The benchmark Sensex retreated for the third day in a row from an all-time high, dropping 246 points to close below the 21,000 level today ahead of inflation and industrial production data that may have a bearing on the RBI's policy next week.
Sentiment was also weighed down by weak global trends on increasing expectations the US Federal Reserve would soon start tapering its monetary stimulus programme.
It was the biggest drop in three weeks for the index, which was dragged lower by Tata Motors, ICICI Bank, ITC and Reliance Industries.
Auto and bank stocks led 11 of the 12 BSE sectoral indices down, with the power index the sole gainer.
The 30-share S&P BSE Sensex resumed lower, in line with feeble Asian cues on the back of a sharp fall on Wall Street yesterday, and moved in a narrow range. Fag-end selling pulled the index further down and it ended at 20,925.61, a fall of 245.80 points or 1.16 %.
It was the biggest drop since November 21. The index has lost 400 points in three sessions.
The 50-share CNX Nifty on the National Stock Exchange slumped 70.85 points, or 1.12 %, to 6,237.05. The SX40 on the MCX Stock Exchange fell 136.94 points to 12,432.57.
"Caution is seen in the market ahead of inflation and IIP numbers and also due to revived concerns over US tapering programme," said Rakesh Goyal, Senior Vice President at Bonanza Portfolio Ltd.
"Economic concerns, profit booking and global cues are primary reasons for this fall."
The Reserve Bank's Mid-Quarter Review of Monetary Policy is scheduled on December 18. The RBI yesterday said it will focus on controlling inflation and improving liquidity.
Tata Motors, the country's largest commercial vehicle producer, fell 4.55%. Reports said its British luxury car unit Jaguar Land Rover increased its investment guidance for the year ending March 2015, which may increase debt and put pressure on the company's free cash flow.
Asian shares closed lower on expectations the Federal Reserve would unwind its stimulus following the provisional budget deal in Washington.
European markets were lower in early trade.
Foreign institutional investors bought shares worth a net Rs 962.71 crore yesterday, according to provisional data issued by the stock exchanges.
"Concerns of Fed starting its tapering process as early as this month resurfaced again after a couple of Fed officials showed inclination towards starting the tapering process a bit early, buoyed by positive economic factors," said Jignesh Chaudhary, Head of Research at Veracity Broking Services.
A weak rupee also added to the pressure in the market, he added.
Tata Motors led 26 Sensex shares lower. The other major losers on the index were ONGC 2.71%, Coal India 2.49%, ICICI Bank 2.36%, Bajaj Auto 2.15% and Maruti Suzuki 1.99%. Tata Power gained 3.84% while HDFC rose 1.15%.
Among the S&P BSE sectoral indices, Auto dropped by 2.2%, followed by Bankex 1.42%, Metal 1.37%, Oil & Gas 1.3%, Capital Goods 1.02%, Healthcare 0.88% and IT 0.72%.
The market breadth remained negative as 1,429 stocks ended with losses, 1,040 finished with gains and 173 ruled steady.
Total turnover rose to Rs 1,835.49 crore from Rs 1,748.76 crore yesterday.