JOIN USFunds and investors booked profits at existing higher levels pulling the barometer index, Sensex, down by 0.98 per cent or 172.63 points to 17,386.08.
This ended two straight sessions of gains, which also had followed strength in global markets after the single European currency Euro gained in anticipation of the rescue package.
The financial crisis in Greece worsened after rating agencies downgraded that country's debt, raising doubts about its ability to meet USD 85 billion worth bond payments later this month.
The benchmark index dropped 212 points in the final hours to touch an intra-day low of 17,345.92 level, after the European stocks opened in red on unease over euro zone sovereign debt levels.
Analysts said weak global cues, coupled with sustained selling in index heavyweights like Infosys, RIL and ICICI Bank dragged the barometer.
"Sentiment was dampened after China raised banks' reserve requirement by 50 basis points to soften record lending and prevent potential asset bubbles" IIFL Vice President (Research) Amar Ambani said.
The National Stock Exchange's wide-based 50-share Nifty Index too fell 1.05 per cent to settle at 5,222.75 points.
Stocks belonging to metal sector were the worst hit, with Sterlite falling 2.40 per cent, Hindalco by 2.75 per cent and Tata Steel by 1.66 per cent.
Out of 30 blue-chip stocks that make up Sensex, 24 closed in the red, while six managed gains.
Reliance Industries, which carries the maximum weight in the Sensex constituents, declined 0.87 per cent to Rs 1,023.5.
Except the BSE Consumer Durable (CD) index, all the other sectoral indices on the BSE were in the red, falling up to 2 per cent.
Mixed trend was seen in auto and IT stocks. Hero Honda, Maruti and M&M rose modestly on boosted April sales data, but Tata Motors ended down by 1.16 per cent.
In front-line IT stocks, Infosys dropped 1.52 per cent, whereas Wipro and TCS rose marginally.
The Euro weakened after three successive days of advance, and European shares fell as the USD 146 billion EU-IMF bailout of Greece failed to calm concern about the region's growing debt problems, said an analyst.
The largest financial rescue of a nation from bankruptcy will involve credit of 80 billion euro from the 15 other euro zone nations and 30 billion euro from the International Monetary Fund (IMF).
Among the losers, Reliance Infra declined the most in Sensex companies. Other losers include HUL that declined by 2.20 per cent, Jaiprakash Associates by 1.97 per cent and Grasim 1.73 per cent.
In Asia, Hong Kong's Hang Seng Index dropped 1.41 per cent. Europe was trading in the red in mid-session, with Britain's FTSE 100 declining by 1.15 per cent.
The US stocks tumbled on Friday to close the worst week since January as news of a criminal probe into Goldman Sachs unnerved investors already anxious about the prospects for heavy regulation from Washington.