The Sensex declined for the fourth week in five, shedding 2.4% in choppy trade on Friday, as worries of continued high global oil prices worsening the domestic inflationary pressures hit investor sentiment.
Earlier on Friday, Prime Minster Manmohan Singh said high headline inflation is beginning to pose a serious threat to country's high growth plans, in one of his strongest warnings over the risk of rising prices.
The 30-share BSE index dropped 2.1% this week and is down more than 12% so far in 2011.
Foreign institutional investors (FII) pulled out $1.5 billion from Indian shares this year until Feb 2, with high inflation and rising violence in Egypt hastening withdrawals as risk aversion grips global investors.
"People are nervous because FII funds are moving out. Participation from domestic investors is completely missing. The market depth seems to be very weak," said Deven Choksey, managing director at KR Choksey Shares & Securities.
Energy major Reliance Industries, with the heaviest weightage in the main index, led losses, dropping 2.5% on concerns it may get sucked into a bidding war for a US asset. Software and financial stocks were also among major losers.
The main index fell on Friday after two days of gains, closing down 441.16 points at 18,008.15 points, its lowest close since August 2010. It had earlier risen as much as 0.5%.
Only 1 of its components closed in the green.
"There is no fresh money coming into the market as investors prefer to stay on the sidelines on Egypt and inflation worries," said Arun Kejriwal, director of research firm KRIS.
"Rising oil prices have added to the poor sentiment in the markets."
Oil was headed for a second straight week of gains as Egypt's volatile situation kept markets on edge, while investors awaited US employment data expected to give direction to prices later in the day.
Rising prices of food and other commodities are expected to trigger more monetary tightening by the Reserve Bank of India central bank, which has raised interest rates seven times since mid-March last year.
Data on Thursday showed food price index rose 17.05% and the fuel price index climbed 11.61% in the year to Jan 22.
Shares in Reliance fell on concerns the company may challenge Chevron's bid for Atlas Energy, according to a letter disclosed by the US natural gas producer.
Software exporters Infosys fell 2.2% and Tata Consultancy Services lost 3.1%, as worries about outsourcing business momentum kept investors on the sidelines. Smaller rival Wipro fell 1.4%.
Consumer goods firms dropped on fears rising input costs and higher inflation will dent growth in coming quarters.
Cigarette maker ITC, which also makes packaged food, lost 4.2%, while top consumer goods maker Hindustan Unilever fell 2%.
Cement makers Ambuja Cements and ACC fell much as 3.5% and 0.9%, respectively, after they said oversupply and rising input costs would keep margins under pressure in the short term.
Both companies, 46%-owned by Switzerland's Holcim, said they continued to bet on long-term demand growth from India's housing and infrastructure sectors, but growing excess supply would result in pricing pressure in the near term.
Bajaj Auto was the only index stock to buck the trend, rising 1.3%.
In the broader market, 2023 declines far outnumbered the 888 gainers on moderate volume of about 295 million shares.
The broader 50-share NSE index lost 2.4% to 5,395.75 points, its lowest close since late-July.