The benchmark Sensex had its biggest drop in six weeks on Thursday and fell 252 points to end below the 21,000 level after a late bout of profit booking wiped out the day's gains.
It was the second straight loss for the index in as many days in the new year as 11 of the 12 BSE sectoral indices declined, led by realty, capital goods and power stocks. The IT sector index gained moderately.
ITC, Larsen & Tourbo, ICICI Bank and Reliance Industries together contributed 131 points to the drop in the Sensex.
BHEL, Tata Power and Coal India led 25 index shares down, leaving only five gainers.
The S&P BSE Sensex opened higher and climbed almost 200 points to 21,331.32 in early trade. The decline started in the afternoon as the index slid to the day's low of 20,846.67, a drop of 485 points from the day's high.
The Sensex ended at 20,888.33, a decline of 252.15 points or 1.19%. It was the biggest fall since November 21, when it lost 406.08 points. The Sensex was back below the 21,000 mark after two weeks.
The broader 50-share CNX Nifty on the National Stock Exchange dropped 80.50 points, or 1.28%, to 6,221.15.
"Nifty opened on a strong note and surged to high of 6,358. However, profit-booking at higher levels was seen in latter part of the day," said Nidhi Saraswat, Senior Research Analyst at Bonanza Portfolio Ltd. "European and Asian indices were also weaker and further dampened market sentiment."
Global stock markets were mixed after weaker manufacturing data in December indicated China's economy might be slowing. India's manufacturing sector decelerated marginally last month amid a slowdown in domestic order flows.
Recently favoured second-line stocks suffered losses on profit-booking by retail investors. The Mid Cap and Small Cap indices fell 1.77% and 2.03%, respectively.
The IT index gained as Infosys, TCS and Wipro advanced amid the rupee's depreciation against the dollar and an improvement in the US economy, their biggest market.