The Nifty fell 1.5 % on Friday, marking its biggest single-day fall in nearly 3-1/2 weeks as blue-chips such as Reliance Industries slumped tracking weaker global markets ahead of US jobs data later in the session. The BSE Sensex lost 1.6 %, or 414.13 points, to end at 25,480.84.
While encouraging for the global economy at large, strong US employment data would strengthen the case for an early interest rate hike by the Fed, whose monetary largesse has helped fuel a 45 % rally in global stocks over the past two years.
This caution was magnified in India after overseas investors sold shares worth 16.54 billion rupees ($273.2 million) on Thursday, their biggest single-day selling since July 2, according to provisional exchange data.
Markets virtually ignored a private survey on Friday showing factory activity expanded at its fastest pace in 17 months in July and data late on Thursday showing annual infrastructure sector growth hit a nine-month high in June.
Caution ahead of the Reserve Bank of India's policy review on Tuesday, its first since the new government's budget, where it is expected to leave its key interest rate unchanged, weighed as well.
"Global risk is weighing but India remains on an uptrend. Expectations for at least a dovish stance by RBI have also grown, so buy on dips," said Deven Choksey, managing director at K R Choksey Securities.
The broader Nifty closed 1.54 %, or 118.70 points, lower at 7,602.60 after going below the psychologically important 7,600 level during the day.
Both the indexes marked their biggest single-day fall since July 8, retreating from the record highs hit last week.
Blue-chips led the fall with Reliance Industries down 3 % and Housing Development Finance Corp HDFC.NS lower 2.7 %.
Cigarette maker ITC fell 1.8 %, while HDFC Bank ended down 2.2 %.
Among other blue-chips, Tata Motors fell 1.5 % and Sun Pharmaceutical Industries lost 2.8 %.
Tech Mahindra Ltd ended down 1.1 % after April-June-quarter net profit lagged estimates.
Pantaloons Fashion & Retail Ltd slumped 10.1 % after posting a wider net loss for the June quarter.
However, among stocks that gained, Maruti Suzuki India rose 2.5 % after July sales beat analyst expectations.