Stock market benchmark Sensex pared initial gains to close 164 points lower, as investor confidence was eroded by Eurozone debt woes with Spanish stocks taking a hit.
Spain's stock index declined 1.8 per cent to its lowest in 14 months and posted the steepest decline among 18 western European benchmarks.
The Sensex, which had risen to 16,895.73 points at open, fell to close lower by 163.97 points at 16,617.10 as heavy-weight stocks in realty, metal and refinery stocks suffered the most.
While Asian stock markets were higher, a weaker opening in Europe played a major role in the mid-session weakness on the bourses here. Concerns of Hungary facing a Greece-liek sovereign debt crisis had pulled down the market yesterday.
Diversion of funds from riskier assets to rising bullion as a safe hedge -- concerned that Europe's sovereign debt crisis might derail global recovery -- also influenced the trading sentiment.
The selling pressure gathered momentum over growing apprehension that the government's decision on shareholding norms for listed companies will flood the market with new offers, eroding share value.
The government last week directed all listed companies to increase public holding in them to 25 per cent.
The wide-based National Stock Exchange index Nifty also fell to crack a crucial 5,000 points level by losing 46.90 points to 4,987.10,
Most companies in oil processing and refinery, led by a index-heaviest Reliance Industries fell after the government postponed the decision on fuel price hike.
A volatile movement in exchange rate between Indian rupee and the U.S. dollar gave negative impact on the information technology sector led by the second-heaviest on the Sensex Infosys Technologies.
Relaince Industries fell by Rs 12.90 to Rs 996.45 and Infosys Technologies by Rs 17.25 to Rs 2,655. The two carry nearly 24 per cent weightage on the Sensex.
Among the other index-related stocks, ICICI Bank fell by three per cent to Rs 916.90, Bharti Airtel by 3.77 per cent to Rs 257.80, Rcom by 4.69 per cent to Rs 167.65, Hindalco Industries by 5.81 per cent to Rs 132.20 and DLF Ltd by 2.57 per cent to Rs 257.45.
In 30-BSE index components, 23 stocks closed with losses while seven advanced. Barring Fast Moving Consumer Goods, all the sectoral indices were in red.