Sensex fails to maintain last week's gains, down 633 points
Concerns over outcome of European Union summit also spooked sentiments.
The 30-share Sensex fell by 633.37 points, or 3.76 percent, to 16,213.46 from its last weekend's level.
The 50-share S&P CNX Nifty also tumbled by 183.45 points, or 3.63 percent, to 4,866.70.
The BSE Mid-Cap index fell 2.47 percent, while the BSE Small-Cap index dropped 2.21 percent.
Facing a harsh political reaction that paralysed Parliament, the Congress-led UPA government put on hold plans to allow foreign multi-brand retailers like Wal-Mart to open stores in India.
Comments of Finance Minister Pranab Mukherjee on gloomy GDP growth also affected the market sentiment. He said surging food and fuel prices amid weak global economic growth are adversely impacting GDP growth of the country.
The centre also said it will not be easy to restrict the fiscal deficit to 4.6 percent of GDP in 2011-12, due to uncertainty on the disinvestment front and a likely increase in subsidies, but maintained that the slippage will be minimal.
Heavy sell-off was seen in capital goods, realty, metal, refinery, power, banking and auto sectors.
Meanwhile, food inflation fell sharply to 6.60 percent for the week ended November 26, against 8 percent in the previous week.
Asian shares ended lower after a closely-watched European Union summit failed to secure the full backing of the 27 nations for treaty changes to help fight the region's debt crisis.
From the 30-member Sensex pack, 28 shares declined and only two rose.
Interest rate sensitive banking stocks fell on profit taking after recent gains, triggered by hopes that a slowing economy could prompt the Reserve Bank of India (RBI) to pause further rate hikes.
Metal and mining shares declined as prices of industrial metals fell. Sterlite Industries (7.35 percent), Coal India (5.31 percent), Tata Steel (4.92 percent) and Hindalco Ind (2.48 percent) and Jindal Steel (0.58 percent) were among
Index heavyweight Reliance Industries (RIL) shed 6.83 percent.
IT stocks outperformed the market on a weak rupee. India's third largest software services exporter by revenue Wipro shot up by 2.50 percent, while Infosys Tech, second largest software services exporter by revenue, rose by 0.35 percent.
Other losers from the Sensex pack were Bharti Airtel (8.06 percent), ICICI Bank (7.12 percent), BHEL (6.50 percent), Larsen (6.39 percent), Mahindra and Mahindra (5.92 percent), Jaiprakash Associates (5.87 percent), ITC (4.58 percent), HDFC Bank (4.50 percent), DLF (4.16 percent), Tata Motors (4.34 percent) and Sunpharma (3.87 percent).
Among the major indices, the BSE-Capital goods fell sharply by 5.42 percent, followed by the BSE-Realty 4.81 percent, the BSE-Oil & gas 4.62 percent, the BSE-Metal (4.52 percent), the BSE-Power 4.33 percent, the BSE-IPO 3.92 percent, the Bankex 3.73 percent, the BSE-Auto 3.38 percent and the BSE-PSU 3.29 percent.
The dollex-30, the dollex-100 and the dollex-200 also dropped by 5.68 percent, 5.40 percent and 5.28 percent, respectively.
Total turnover at the BSE and NSE fell to Rs 8,808.57 crore and Rs 38,674.95 crore, respectively, against the last weekend's level of Rs 9,980.59 crore and Rs 55,291.88 crore.