The BSE benchmark Sensex failed to hold on to mid-week gains and ended the week lower by 75 points at 19,242.00 due to tail-end selling from operators triggered by worries over the US budget issue.
With this the 30-share index extended its losses for the second straight week.
Investor sentiment took a further hit after CBI on Friday filed a chargesheet in connection with alleged irregularities in spectrum allocation during the BJP-led NDA Government. The Central agency named three telecom players, including Bharti Airtel, as accused in the chargesheet.
A steep fall in overseas stock markets on worries over US budget deficit issue pulled down domestic shares.
"Global cues were not supportive as US fiscal cliff issues continued to overshadow other economic news," Amar Ambani, Head of Research at IIFL, said.
Trading sentiment was also dampened after Government lowered the growth projection for the current financial year to 5.7-5.9% from 7.6% estimated earlier.
The BSE benchmark resumed lower at 19,290.92, but recovered afterwards to hit a high of 19,520.51 on expectation of easing of monetary policy by Reserve Bank of India (RBI) next month.
On its policy review on Tuesday, the Central bank kept key interest rates unchanged, but indicated that they may be cut in the next review.
However, the Sensex fell on fag-end selling due to weakness in global stocks on concerns over fiscal cliff in the world's largest economy. It settled at 19,242.00, a loss of 75.25 points, or 0.39%, over the last weekend close.
The NSE 50-share Nifty dropped 31.90 points, or 0.54%, to end the week at 5,847.70.
Good buying in metal stocks following indication of economic recovery in China, the world's largest consumer of copper and aluminium, boosted the market sentiment.
Pharma, IT and auto shares also were in demand.
Foreign Institutional Investors (FIIs) continued their buying spree during week, investing a net Rs 4,590.94 crore, including the provisional figure of December 21.
According to analysts, the next week will witness volatility in the markets as traders generally prefer to roll over positions ahead of the expiry of derivatives segment.
The December series will end on Thursday. The BSE and NSE will remain shut on December 25 on account of Christmas.
Major losers from the Sensex pack were L&T (3.01%), HDFC (2.81%), ITC (2.69%), HDFC Bank (1.80%), Bharti Airtel (1.54%), RIL (1.94%) and M&M (1.30%).
However, Tata Steel rose by 8.13%, Hindalco 7.62%, Jindal Steel 5.52%, Cipla 3.67%, Sterlite Ind 3.31%, Tata Motors 2.57%, Maruti Suzuki 1.99%, Sun Pharma 1.85%, HUL 1.63% and Hero MotoCorp gained 1.52%.
Among the sectoral indices, the BSE-Capital Goods dropped by 2.15%, BSE-CD 1.80%, BSE-Oil&gas 1.23%, BSE-Realty 0.90% and Bankex lost 0.80%.
However, the BSE-Metal rose by 4.44%, BSE-HC (health care) by 0.97% and BSE-Auto was up 0.81%.
The total turnover at BSE and NSE was Rs 12,784.27 crore and Rs 63,160.24 crore, respectively as against the last week's level of Rs 10,387.37 crore and 64,486.65 crore.
The Indian rupee continued its downslide for the third week in a row as it tumbled by 58 paise to close at a three-week low of 55.06 against the Greenback following sluggish local equities amid sustained dollar demand from importers.
However, sustained capital inflows made a feeble attempt to restrict the rupee fall.
At the Interbank Foreign Exchange (Forex) market, the domestic unit resumed the week better at 54.41 a dollar from last weekend's close of 54.48 and immediately touched a high of 54.40.
Later, it continued to decline and logged a low of 55.30 before concluding the week at 55.06, showing a fall of 58 paise or 1.06%. In three weeks of losing string, it has plunged by 80 paise or 1.47%.
The Indian benchmark sensex closed the week down by 75.25 points or 0.39% while Foreign Institutional Investors (FIIs) pumped in USD 817.29 mln in the first four days of the week.
Experts said government lowering the growth projection for the current financial year to 5.7-5.9% from 7.6% estimated earlier dampened the rupee sentiment.
On Tuesday, the RBI kept short-term lending (repo) rates and cash reserve ratio (CRR) unchanged in the mid-quarter policy review, hinting easing of rates in the next meeting scheduled on January 29, 2013.
The rupee attempted a recovery at mid-week on hopes of more capital coming into the banking system after Parliament passed the crucial Banking Bill.
"Persistent demand from importers, mainly oil refiners, to meet their month-end needs and also year-end dollar buying weighed on the rupee and will further put pressure on the rupee and could drift it towards 55.00 levels once again," said Abhishek Goenka, Founder and CEO, India Forex Advisors.
"The weakness in rupee was mainly on account of recovery in the dollar index, euro falling below USD 1.3200 levels and uncertainties over US fiscal cliff." he added.
The RBI fixed the reference rate for US dollar and euro at Rs 55.0860 and Rs 72.7730 from Rs 54.3880 and Rs 71.2920, respectively, in the last weekend.
The rupee premium for the forward dollar dropped further on sustained receivings by exporters.
The rupee premium for the benchmark six-month forward dollar payable in May declined further at 157-1/2-159-1/2 paise from last weekend's level of 164-165 paise and far-forward contracts maturing in November also remained weak at 301-303 paise as against 309-1/2-311-1/2 paise.
The rupee dropped further sharply against Pound Sterling to end the week at 89.44 from previous weekend's close of 87.82 and also tumbled against the euro to finish at 72.71 from last weekend's level of 71.35.
However, it reacted downwards against the Japanse yen to close at 65.42 per 100 yen from 65.04 last weekend.