logjam in Parliament over the CAG report on coal block allocations, raising fears of delay in further reform process.
Statement on interest rates given by Reserve Bank Governor D Subbarao in US also affected the market sentiment.
He said, "The battle against inflation has not ended yet... it is still much above RBI's comfort level of 5-6 % and to control it we need to keep interest rates high, but to support growth we need to keep interest rates low."
The 30-share index on Monday touched a high of 17,820.07, but then declined for the most of the week and touched a low of 17,337.61 before ending the week at 17,429.56, showing a net loss of 353.65, or 1.99 %.
The index had gained 944.02 points, or 5.61 %, during the last four weeks.
The NSE 50-share Nifty also dropped by 128.20 points, or 2.38 %, to end at 5,258.50. It had gained 286.85 points, or 5.62 %, in the last four weeks.
The global markets were also under selling pressure for most of the week ahead of the much-awaited speech from US Federal Reserve Chairman Ben Bernanke on August 31 at an annual gathering of Central bankers in Jackson Hole town in Wyoming as investors waited for the outcome of the summit.
According to experts, though seasonal rainfall trend has improved, crop sowing levels have remained lower due to below average monsoon that could have a "downside risk" to the economic growth forecast for the current fiscal, affecting summer crop outlook and food inflation. This, too, affected the market sentiment to some extent.
Metal stocks were at the receiving end on fall in metal prices on London Metal Exchange and weakness in Chinese economy. As a result, the sectoral BSE-Metal index was the top loser, slipping 7.05 %.
Interest rates sensitive stocks from realty, auto and banking spaces also suffered heavy losses on no hopes of rate cut by the apex bank in the next monetary policy meeting on September 17 despite moderate fall in inflation, which was said to be still above the Central bank's comfort level.
Gross domestic product (GDP) edged up from nine-year low of 5.3 % in January-March quarter to 5.5 % in April-June period this fiscal, but it was sharply lower from 8 % in the same period a year ago. The slowdown in GDP growth in Q1 FY13 also affected the market sentiment.
Meanwhile, Foreign Institutional Investors (FIIs) continued their buying spree during the week by investing Rs. 3,502.42 crore in Indian stocks.
"On the first day of September settlement, the stock market corrected further and Nifty sinked to 5260. This was purely because shorts were rolled over and market movers did not roll longs even on the last day.
"This made them to built fresh positions at discount to the market and not at premium. Traders kept on shorting. Now on 13th Sept FED may meet again and on 17th Sept RBI will meet for policy decision. The buzz of rate cut will once again become stronger which will lead market to test new high," Kishor Ostwal, CMD, CNI Research Ltd, said.
Major losers were Jindal Steel (12.38 %), Sterlite Ind (11.62 %), Tata Steel (8.18 %), Hero Motoco (7.36 %), BHEL (7.27 %), Hindalco Ind (6.49 %) Bharti Airtel (6.26 %), Reliance Ind (5.29 %), Bajaj Auto (5.65 %), Larsen (5.61 %), Icici Bank (4.86 %), Coal India (3.86 %), ONGC (3.81 %), Gail India (3.00 %), Tata Motors (2.79 %), Maruti (3.27 %), SBI (2.63 %).
However, Cipla rose by 6.57 % followed by Wipro 3.94 %, HUL 3.22 %, TCS 1.84 %, HDFC 2.98 % and Tata Power 1.16 %.
The total turnover at BSE and NSE rose to Rs. 10,363.05 crore and Rs. 52,068.03 crore, respectively, from the last weekend's level of Rs. 7,886.40 crore and Rs. 37,247.09 crore.
Forex: In a lackluster trade for most of the week, the rupee recovered nearly all of its early losses, still ending lower by a two paise at 55.52 against the Greenback during the week under review.
At the Interbank Foreign Exchange (Forex) market, the domestic currency resumed the week lower at 55.57 and dropped further to a one-week intra-trade low of 55.88 on Tuesday on month-end dollar demand from importers, mainly oil refiners and also weakness in local equities.
Forex dealers attributed listless trading most of the week to traders taking a cautious approach ahead of high-profile speeches on August 31 by US Federal Reserve Chairman Ben Bernanke at the Jackson Hole Symposium and European Central Bank (ECB) chief Mario Dharghi.
However, the rupee later bounced back with a vengeance to settle the week' high of 55.52, still showing a modest fall of two paise over its last weekend's close of 55.50.
Late bounce was due mainly to dollar selling by exporters on expectations of fall in dollar value overseas.
The dollar was under pressure on hopes of US Federal Reserve's chief on Friday dropping hints on monetary easing at the Jackson Hole conference in Wyoming, which later helped the rupee recovery.
The Indian benchmark Sensex closed the week lower by 353.65 points, or 1.99 %, while Foreign Institutional Investors (FIIs) infused $449.45 million on August 30, taking a total to over $12.29 billion in the current calender year so far, as per Sebi data.
Meanwhile, the gross domestic product (GDP) edged up to 5.5 % in April-June this fiscal, from nine-year low of 5.3 % in the preceding quarter, but was sharply down from 8 % in the same period last fiscal.
Pramit Brahmbhatt, CEO, Alpari Financial Services (India) said, "The INR started the week on a weak note and continued to weaken till the last but one day where it pared most of the weakness and ended the week little above the open levels."
"The government and the RBI had a sigh of relief after the marginal improvement in Q1 GDP numbers on the last day of the week. The GDP numbers silenced the critics and players, sending a strong message that the India knows what it is doing and what has to be done. The government has also shown strong commitment for policy reforms by mid of September, capping weakness in INR," he added.
The RBI fixed the reference rate for US dollar and euro at Rs. 55.7215 and Rs. 69.6555 from Rs. 55.3820 and Rs. 69.4760 last weekend, respectively.
The benchmark six-month forward dollar payable in February settle at 187-189 paise and and far-forward contract maturing in August ended at 343-345 paise.
The rupee moved down further against Pound Sterling to end the week at 87.99 from previous weekend's close of 87.89 and also remained weak against the euro to 69.90 from 69.38.
However, it recovered slightly against the Japanese yen to 70.68 per 100 yen from last weekend's level of 70.74.