While the Sensex ended near the day's low, the Nifty ended below the 5200 mark. The Sensex shed 309 points at 17,053 and the Nifty shed 94 points at 5,184.
During the day, the BSE benchmark index touched the day's high at 17,378 and the day's low at 17,022.
ICICI Bank was the biggest dragger on the Sensex accounting for a 54-point loss. Reliance Industries, followed closely and accounted for a 31-point loss on the Sensex.
In Asia, Japan's Nikkei share average edged higher, recovering from last week's retreat, as investors bought metal shares and picked up laggard blue chips, with a softer yen continuing to underpin market sentiment.
The Nikkei closed 0.1% higher at 10,018 points after logging its biggest one-day percentage fall in two months on Friday, while the broader Topix index was down 0.1% at 852.
The Shanghai Composite index ended marginally higher at 2,351, while the Hang Seng remained unchanged at 20,669.
Meanwhile, European markets were mixed. At 1600 hours, the DAX was higher by 0.34%, while the FTSE 100 was leading the CAC 40 lower. They were down 0.31% and 0.20% respectively.
Back home, all the sectoral indices spent the session in the red. BSE Realty, Bankex, Metal and Oil & Gas indices, down 2-4% each, led the losses.
DB Realty, HDIL, Unitech and DLF, down 4-8% each were the major losers from the Realty space. Unitech declined over reports that the real-estate developer sought the Company Law Board's approval to move a case on a dispute over their telecom joint venture with Norway's Telenor to an arbitration panel, potentially escalating the row.
From among the financials' Axis Bank, ICICI Bank, Yes Bank, Punjab National Bank and Canara Bank, down 4-5% each, were the notable losers.
According to media reports, the Reserve Bank of India will monitor banks' overseas operations of Indian banks, which have expanded their global operations substantially in the past few years.
"SBI, ICICI Bank and Bank of Baroda are among the prominent banks that will face the RBI inspection as some banks have as high as a fifth of their total assets beyond the shores," the report suggests.
ICICI Bank, Tata Power, Sterlite Industries, Cipla and DLF, down 4% each, were the prominent losers, from among the Sensex 30 stocks. There were no gainers from the pack.
Shares in Reliance Industries were hit by concerns about its exploration and production (E&P) business, primarily due to continued regulatory uncertainty over the development of its KG-D6 block.
Output from KG-D6 has been declining for more than a year, resulting in a sharp fall in India's gas output and forcing the country to resort to increased imports of expensive liquefied natural gas (LNG). The stock ended at Rs 730, down 2%.
Kingfisher Airlines traded lower by 7% at Rs 16.75 ahead of the Directorate General of Civil Aviation (DGCA) report which may be released later today.
According to the media reports, civil aviation minister Ajit Singh has warned Vijay Mallya, the promoter of the private sector carrier, to pay his dues in order to keep flying. Kingfisher has a total debt of about Rs 7,000 crore and accumulated losses of about Rs 6,000 crore.
The financial crunch has hit Kingfisher's operations with dozens of flights being cancelled, added report.
Manappuram Finance dipped 11% to Rs 32.35, extending its 20% fall in the past two trading days, after the Reserve Bank of India (RBI) tightened rules for lending against gold by finance companies.
The central bank on last Wednesday tightened rules for lending against gold by finance companies, saying the rapid growth in such loans in the past few years had increased risks to the banking system and retail investors.
The overall market breadth was negative as 1,951 stocks declined against 921 advancing ones, on the BSE.