Further, the Russian benchmark equity index MICEX was down nearly 10% and the Russian central bank hiked key lending rate by 150 basis points to 7% after the rouble plunged to an all-time low against the US dollar.
For the day, the 30-share Sensex was down 173 points at 20,947 after hitting an intra-day low of 20,921 and the 50-share Nifty was down 56 points at 6,221 after touching an intra-day low of 6,212.
However, the broader markets were resilient with the smallcap index closing flat with a positive bias and the midcap index slipped by 0.3%, both outperforming the BSE benchmark index which was down 1%.
The rupee trading lower at 62 per dollar after falling to 61.95 earlier in the session, versus Friday's close of 61.75/76.
Dealers watching for the timing of possible dollar outflows related to Iran oil payments.
India is ready to pay $1.5 billion to Iran to clear part of a backlog of payments for shipments of oil following the partial easing of western sanctions on Tehran, Oil Secretary Vivek Rae said on Tuesday.
The rising threat of war between Ukraine and Russia spooked markets and sent investors scurrying for relative safety on Monday, pushing stocks down sharply and lifting gold to a four-month high.
No major regional bourse escaped the aggressive selling, with all down more than 1% and Germany's DAX particularly hard hit, tumbling 2.5%.
That had followed overnight weakness in Asia, with MSCI's broadest index of Asia-Pacific shares outside Japan down 0.9% and Japan's Nikkei 225 skidding 1.3%, while futures for the U.S. Standard & Poor's 500 slid 0.9% off Friday's record high.
Chief beneficiaries of the market-wide flight from risk were gold, German benchmark debt and the Japanese yen and other currencies perceived as safe-havens in times of heightened volatility, while oil was supported by the demand outlook.
Concern about China's economy also weighed on markets after a purchasing managers' index showed China's vast factory sector contracted again in February.
Sectors and Stocks
Barring Consumer Durables and Oil & Gas indices which closed up 1.7% and 0.2% respectively, all the other sectoral indices finished the session in red.
Bankex, Power, Auto, Teck, IT and Health Care indices down 1-2% were the major sectoral losers.
Select auto, financial, capital goods and healthcare shares which had gained sharply last week amid firm buying by foreign funds witnessed profit taking at higher levels.
Top Sensex losers include, TCS, ICICI Bank, Tata Motors, Sun Pharma, L&T, HDFC, Infosys and Dr Reddy's Labs, Mahindra & Mahindra down 1-3%.
The market breath was negative on the BSE. 1,477 stocks declined while 1,207 stocks advanced.
Nestle India dipped nearly 4% to Rs 4,663, extending its Friday’s 3% fall.
Stocks of companies associated with the railways are trading higher by up to 17% in noon deals on media reports that the government is likely to take up new norms for liberalising the foreign direct investment (FDI) regime in railways.
Kernex Microsystems (India), Kalindee Rail Nirman (Engineers), Titagarh Wagons, Texmaco Rail and Engineering and Hind Rectifiers were up 7-12%.
Monsanto India was locked in upper circuit for second day in a row, up 10% at Rs 1,613, also its new high on the BSE, on reports that the Union ministry of environment and forests (MoEF) has approved field trials of genetically modified (GM) food crops on a conditional basis.
Power generation firm Jaiprakash Power Ventures' stock tanked a whopping 15.5% after reports said that a consortium led by Abu Dhabi-based National Energy Co (TAQA) has agreed to buy two hydroelectric power plants from the company for about US$616 mn
TVS Motor Company gained 2% at Rs 87.5 after reporting 6% year-on-year growth in two-wheeler sales in February 2014 to 170,293 units from 160,895 units during the same month last year.