Brushing aside rate cut hopes, the benchmark BSE Sensex on Tuesday slipped 150.77 points to 25,705.93, with investors staying away from firmer bets, as the focus shifted to US central bank's policy meet for more cues.
Fresh weakness in China too weighed as the Shanghai index fell below the crucial 3,000-mark. Profit-booking was also seen in Monday's gainers, which had got a boost on easing inflation numbers.
"Participants ignored the CPI inflation data announced post market," said Jayant Manglik president of Retail Distribution at Religare Securities.
Bourses closed in red tracking mixed global cues and lack of conviction among participants ahead of the US Federal Reserve two-day policy meeting starting Wednesday, he added.
Meanwhile, government data which came out Monday showed retail inflation fell to a new low of 3.66% in August. Even WPI inflation eased further to (-)4.95% in August.
The data raised expectations that the Reserve Bank would cut interest rates for the fourth time this year at its policy review due on September 29.
The 30-share BSE index after shuttling between 25,909.83 and 25,649.37 during the session finally settled lower by 150.77 points or 0.58% at 25,705.93. The gauge had gained 246.49 points in Monday's session.
The NSE Nifty too edged lower by 43.15 points or 0.55% to end at 7,829.10. Intra-day, it cracked the 7,800-mark to touch a low of 7,799.75 and a high of 7,880.00.
Tata Steel suffered the most among Sensex constituents by falling 5.08%, followed by Vedanta (4.06%).
Metal, capital goods, consumer durable, auto and banking shares came under heavy selling pressure.
In overseas markets, most of the Asian markets ended weak following overnight fall in US amid uncertainty ahead of a Fed meet.
Key indices China, Hong Kong, Singapore and Taiwan fell between 0.49% to 3.52%, while Japan and South Korea moved up by 0.32% to 0.34%.
European markets were also lower as key indices in France, Germany and UK moved down by 0.14% to 0.65%.
Pramit Brahmbhatt Veracity Group CEO said: "Investors preferred to book profit at higher levels as they doubted the further upside movement. At the same time they are waiting for the release of US Fed rate decision due for the week, which will show the road ahead."
Consequently, out of 30-share Sensex pack, 23 scrips ended lower.
Major losers were Tata Steel (5.08%), Vedanta (4.06%), Tata Motors (3.69%), Hindalco (3.05%), Larsen (2.92%), Axis Bank (2.67%), M&M (1.80%), Hero MotoCorp (1.62%) and ICICI Bank (1.12%), while HUL rose 1.1%, followed by Sun Pharma and ITC.
Among BSE sectoral indices, metal fell by 2.34% followed by capital goods 2.11%, auto 1.66%, consumer durables 1.55 per cent and bankex 0.97 per cent.
The market breadth turned negative as 1,521 stocks closed in red while 1,100 stocks finished in green and 103 ruled steady. The total turnover rose to around Rs 2,241 crore from Rs 1,979.79 crore on Monday.