Retreating from record highs, the benchmark Sensex on Monday slipped 134.37 points to 28,559.62 and Nifty dipped 32.35 points to 8,555.90 in their first drop in four sessions on caution ahead of RBI's policy review and fag-end selling due to weak global cues.
Refinery, power, metal and capital goods shares fell while consumer durable and IT stocks attracted buying support.
Oil stocks fell after global crude prices hit five-year low. However, airline stocks rose after jet fuel became cheaper.
The S&P BSE 30-share Sensex resumed better and firmed up further to a high of 28,809.64 on initial buying after the manufacturing output accelerated in November at the quickest pace in nearly two years. Tepid GDP growth also boosted hopes of a rate cut by RBI in its monetary policy meeting on Tuesday.
However, Sensex failed to maintain initial gains and dropped to finish at 28,559.62, a loss of 134.37 points or 0.47%, amid a weak global trend. In previous three days, it had risen by 355.94 points or 1.26%.
"Participants preferred to sit on sidelines and booked some profit ahead of RBI's monetary policy review scheduled for Tuesday," said Jayant Manglik, president of retail distribution, Religare Securities.
The CNX 50-share Nifty also opened higher and moved up further to new lifetime high of 8,623.00 before settling at 8,555.90, logging a loss of 32.25 points or 0.38%.
Foreign Portfolio Investors (FPIs) bought shares worth a net Rs 935.86 crore last Friday, as per provisional data.
Jewellery stocks, including Gitanjali Gems and Titan Company, shined after RBI withdrew the 80-20 rule and restrictions on import of gold.
Asian stocks ended down as a Chinese manufacturing gauge dropped and American holiday spending slowed, reports said.
Key indices in China, Hong Kong, Singapore, South Korea and Taiwan dropped by 0.10% to 2.58%, while Japan's Nikkei ended higher by 0.75%.
European stocks were also trading lower as key indices like France, Germany and UK moved down by 0.38% to 0.99%.
"RBI policy kept investors cautious while weakness in the rupee and profit taking weighed on banking stocks dragging the benchmark. Global markets also traded with negative bias on back of fall in major commodity prices of Brent and gold," said Kiran Kumar Kavikondala, director and CEO, WealthRays Securities.
In all, 18 out of 30 Sensex-based scrips closed in the red while others finished in the green. ONGC was the top loser with a fall of 3.98%, followed by Hindalco 3.85%, BHEL 3.25%, RIL 2.94%, Tata Power 2.74%, Tata Steel 2.46% and M&M 2.09%.
Sesa Sterlite 1.99%, HDFC 1.89%, Gail India 1.83%, NTPC 1.82%, Bharti Airtel 1.13% and L&T 1.12% also ended in the red.
However, Hero MotoCorp rose by 3.69%, HUL 2.75%, TCS 1.89%, Axis Bank 1.73%, Maruti Suzuki 1.61%, Cipla 1.28% and Wipro 1.21%.
Among the S&P BSE Sectoral indices, Oil&Gas dipped by 2.57%, Power by 2.25%, Metal by 2.14% and Capital Goods 1.37%.
On the other hand, Consumer Durables firmed up by 3.31% and IT by 0.84%, among others.
Total market breadth was negative as 1,675 stocks closed with losses while 1,218 settled with gains.
Total turnover dropped to Rs 3,154.65 crore from Rs 3,834.96 crore last Friday.