The BSE Sensex touched its lowest level since June 2010 on Friday, joining a slide in Asian stocks, as fresh worries that the global economy is slipping back towards recession prompted investors to cut positions in risky assets.
Shares in frontline financial and technology firms lost 3% to 4% each on selling by foreign investors, while top listed firm Reliance Industries slid to its lowest level since April 2009.
By 11:50 AM (0620 GMT), the 30 share BSE index was down 3.2% to 17,120.39 points, but had fallen to a near 14-month low of 17,208.83 at one stage. Only one of its components still traded in positive territory.
"Basically, it's the global headwinds which are rubbing off, and right now there is risk aversion," said Ambareesh Baliga, chief operating officer at Way2Wealth Securities.
"Export or interest rate-dependent sectors are seeing more weakness than others," he added.
Asian markets tumbled on Friday after the overnight selloff on Wall Street, on fears the United States is staring at another recession and that Europe's sovereign debt crisis is swallowing two of its largest economies.
By 0453 GMT, the MSCI's measure of Asian markets other than Japan was down 4.6%, while Japan's Nikkei lost 3.7%.
Software stocks were among the worst hit, on worries the worsening situation in the United States and Europe – key markets for Indian software firms, could hurt growth prospects.
Tata Consultancy Services fell 3.2%, while smaller rivals Infosys and Wipro lost 3.3% and 1.9%, respectively.
Financial stocks, already suffering after last week's larger-than-expected 50 basis point increase in key rates, slipped further as investors used the overall market situation as an opportunity to cut positions in the sector.
Largest lender State Bank of India was down 1.9%, while private sector rivals ICICI Bank lost 2.7% and HDFC Bank fell 1.3%.
Energy major Reliance Industries touched a low of 786 rupees, its lowest level since April 2009. The stock has already lost a quarter of its value so far in 2011, mainly weighed down by worries of slowing production from its showcase gas fields off India's east coast.
"The question we need to ask is whether as an economy India will be as affected as others, if there is a global downturn," Baliga said.
"Based on that, I do expect that India would be one of the focus markets, once liquidity starts flowing again, after a couple of weeks," he said.
Shares in Ranbaxy Laboratories, India's top drugmaker by sales, were down 1.4 % to 525.50 rupees ahead of its quarterly earnings. The firm, controlled by Japan's Daiichi Sankyo is expected to report a 40 % decline in quarterly profit.
Shares in state-run Oil and Natural Gas Corp bucked the trend, up 1.4 % to 276.90 rupees, after U.S. crude fell below $86 a barrel, heading for its biggest weekly drop since early May.
The drop in benchmark crude prices would help ease the firm's subsidy burden, which it shares in the form of discounts to refiners, analysts said.
The 50-share NSE index fell 2.4 % to 5,203.25 points.
In the broader market, the negative trend was stark, with 1,329 declines compared to 84 advances, on heavy volume of about 232.65 million shares.
Top three by volume on NSE
* Lanco Infratech on 12.9 million shares
* Jaiprakash Associates (JAIA.NS) on 8.3 million shares
* Unitech on 8.1 million shares
Stocks on the move
* Shares of state-run oil marketing firms including Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp rose between 2 to 3 % each after crude oil prices headed for its biggest weekly drop since May. India imports 80 % of its crude oil requirements.
* Mukand Ltd fell 2.8 % to 38.65 rupees, after the steel maker said on Thursday the mining ban has affected alloy steel production at its Hospet facility.