Sensex declined 1.3% on Thursday, ignoring robust industrial output growth in March, and joined the sell-off in world equities as weaker commodit y prices weighed on investor sentiment for riskier assets .
Industrial output grew at a much faster-than-expected pace in March, allaying fears of a slowdown in the economy that will allow the central bank to continue with rate hikes to control stubbornly high inflation.
Financials led the losses on continued concerns of rising interest rates, with the sector index losing 1.6%.
The 30-share BSE index closed 1.34%, or 249.17 points, lower at 18,335.79 points, with 26 components declining. The index had briefly turned positive immediately after the industrial output data.
"We will continue to see volatile trade for some time now, until commodities, mainly oil settles down," said Prasanth Prabhakaran, president of retail broking at IIFL.
"Oil within $90 to $100 is comfortable, but beyond that it is a worry for our country."
Oil slipped to around $112 a barrel on Thursday, extending the previous session's sell-off .
Deven Choksey, managing director and CEO of brokerage
KR Choksey Shares, said the market would drag for a while as there were no positive triggers in sight.
Concerns over hardening interest rates have led to some caution from foreign institutional investors, who are key drivers of Indian stocks.
They have been sellers in nine of 12 sessions to May 10, offloading more than $1 billion of Indian equities in the period.
The BSE main index is down 10.6% year-to-date, lagging MSCI's emerging equities index which is only down 0.3% in 2011.
The 50-share NSE index ended the day down 0.3% at 5,546.25 points.
Losers outpaced gainers in the ratio of 2.4 to 1, on a volume of 605 million shares on the NSE, lower than its 90-day daily average volume of 641 million shares.
Top lender State Bank of India shed 1.3%, while leading private lenders ICICI Bank and HDFC Bank
dropped 2.3% and 0.9%, respectively.
Mortgage lender Housing Development Finance Corp was down 2.8%.
Metal producers dropped as base metal prices slumped in international trade. Sterlite Industries, Hindalco and Tata Steel declined between 1.6% and 5.1%.
Copper tumbled to a five-month trough as investors headed for the exit, fearing slower economic growth and demand from top consumers China and the United States.
The MSCI's world equity index fell 1% by 1029 GMT, while its emerging market sub-index slid 1.6 %.