Traders said the market sentiment was also hit as the government-BJP stand-off over CAG report on coal block allocation continued even on Monday, signalling the possibility of a washout of the remaining four days in the monsoon session.
The BSE benchmark index, which jumped to a high of 17,509.99 on an expert committee on general anti avoidance rules (Gaar) recommending the postponement of the tax rule by three years, fell back sharply to end with a loss of 45.16 points at 17,384.40 -- its second straight session of losses.
"Market corrected even today though the announcement of Gaar deferment is very positive," said Kishor P Ostwal, CMD, CNI Research.
RIL, ICICI Bank and Tata Motors pulled the 30-share index down.
Jindal Steel, which lost 2.23%, led 17 Sensex losers, followed by Tata Power and ONGC. ITC was unchanged.
Among 12 winners, Bajaj Auto rose 3.04% while CIL, Cipla, Bhel gained between 1-2%.
"The Parliament remained disrupted for ninth consecutive day, along with weaker manufacturing data released which shows the numbers at nine-month low levels underpinned the bearish sentiment," said Nidhi Sarswat, senior research analyst, Bonanza Portfolio.
Brokers said reports that HSBC India Manufacturing Purchasing Managers' Index – a measure of factory production – easing to 52.8 in August, from 52.9 in July, caused selling.
The market received another jolt as reports said Morgan Stanley lowered India's growth forecast to 5.1% for the current fiscal from 5.8%, citing high fiscal deficit and renewed weakness in external demand.
The 50-share National Stock Exchange index Nifty ended down by by 4.75 points, or 0.09% at 5,253.75.
Asian stocks ended narrowly mixed with upward bias amid hopes that global central banks will take stimulus measures to spur economic growth.
Key indices in China, Hong Kong, South Korea and Taiwan closed higher while those from Japan and Singapore settled lower.
However, European markets were trading higher in afternoon deals.
The CAC was up by 0.57%, the DAX by 0.45% and the FTSE by 0.48%.
Back home, major losers from the Sensex pack included Jindal Steel (2.23%), Tata Power (1.91%), Tata Motors (1.24%), Tata Steel (1.23%), ONGC (1.20%), M&M (1.03%) and RIL (1.00%) while Bajaj Auto rose by 3.04%, followed by Coal India (2.18%), Cipla (1.79%), Maruti Suzuki (1.79%) and BHEL (0.98%).
Among the sectoral indices, the BSE-Realty eased by 0.86%, the BSE-Oil&Gas (0.80%), the BSE-Bankex (0.65%) and the BSE-Metal (0.59%).
Among gainers, the BSE-CG moved up by 0.63% and the BSE-CD rose by 0.61%.
Talking about Nifty's outlook, Milan Bavishi, head research, Inventure Growth & Securities said: "Overall for this week, Nifty has resistance at 5530 and on the downside 5220 is a critical support."
The total market breadth turned negative as 1,419 stocks ended down while 1,380 scrips finished higher.
The total turnover dropped further to Rs. 1,644.47 crore from the last Friday's level of Rs. 1,843.80 crore.