The benchmark 30-stock BSE Sensex fell 347.5 points to close at 19,379.77, a three-week low.
Failure to pass a stopgap spending bill before the new fiscal year begins on October 1 can halt work at government agencies and non-essential state-run programmes in the US for the first time in 17 years.
This can pull down stock markets and hit emerging economies such as India. The outage could nudge foreign investors to pull out and park funds closer home. The resultant flight of dollars can potentially weaken the rupee further and upset plans to contain CAD.
Fears of a shutdown in the US and reports that Italian PM Enrico Letta had called a parliamentary vote of confidence on Wednesday loomed over nervous global equity and currency markets.