The benchmark Sensex of the Bombay Stock Exchange on Thursday shed 147.5 points, or 0.8%, to close at 18,471 on worries around fiscal problems of the US.
Taking a cue, the rupee also touched a two-month low of 55.08, before recovering losses to end at 54.70, a gain of 18 paise, or 0.3%.
Thursday's close was the lowest for the Sensex in the last 15 days. The 30-share index has lost 431 points in the last five sessions.
"Foreign institutional investors (FIIs) sold shares worth R18.1 crore on November 13, 2012, according to provisional data from stock exchanges," Alex Mathew, head, research, BNP Paribas said.
"On the international front, the European stocks were down on the statement of US President Barack Obama that tax concessions for the high earners should expire at the beginning of next year. The US index futures were trading up."
After the initial fall, the rupee reversed a three-day losing string on dollar sales by banks amid recovery in euro in overseas markets.
The rupee has fallen by 68 paise, or 1.3%, in the last three trading sessions.