JOIN USWeak global cues further dampened the sentiment.
The Bombay Stock Exchange key index, Sensex, dropped by 146.36 points, or 0.81 per cent to 17,985.88, a level last seen on May 25, after the Reserve Bank of India hiked lending rates by 25 basis points for the tenth time since March 2010.
BSE data showed that overseas investors sold a net Rs 3.73 billion of stocks yesterday, turning net sellers of the equities this year for the first time since June 1.
Fall in Emerging-market stocks dragged the Sensex to a three-month low, amid concerns that increased efforts to cool inflation in India and China will curb economic growth amid a worsening debt crisis in Europe.
Broad-based National Stock Exchange index Nifty lost 50.75 points, or 0.93 per cent to 5,396.75 level.
On the BSE, Reliance Industries (RIL) and Infosys that carry the maximum weight on the 30-share gauge, Sensex, also declined. RIL fell to a two-year low at Rs 888 a piece, after it was downgraded by HSBC Holdings.
IT bellwether Infosy fell by Rs 33.35 to Rs 2,800.55 following a weak trend in the US markets. The software exporter gets more than 50 per cent of its revenue from the US and European markets.
Interest-rate sensitive banking stocks also suffered. Market leaders like HDFC Bank and ICICI Bank dropped by Rs 29.50 to Rs 2,342.90 and Rs 4.55 to Rs 1,028.50, respectively.
Heavy machinery stocks led by Larsen and Toubro fell on concern that higher borrowing costs will hurt profit margins. Larsen lost Rs 34.25 to Rs 1,679.70, Siemens India by Rs 3.50 to Rs 872.30 and ABB Ltd by Rs 9.50 to Rs 841.50.