Indian markets continued to be gripped by the pessimism afflicting global markets after the benchmark equity indices fell the most in Asia on Monday.

This followed a 3 per cent fall in the S&P 500 index on Friday owing to a deepening of the sub-prime, or high-risk home loan market, crisis in the US.

Shares of banking companies, which have been impacted due to the Rs 60,000-crore agri-loan write off in the Union Budget, led the fall.

The Bombay Stock Exchange's 30-share Sensex ended at 16,677.88 points, lower 900.84 points or 5.12 per cent.

The broad-based 50-share Nifty ended at 4,953 points, down 270.5 points or 5.18 per cent.

All the other Asian markets including Japan's Nikkei (down 4.49 per cent), fell less than the Indian markets, though experts stressed the Indian economy was de-coupled from a US recession.

Monday's fall, which was the worst since the January-end crash, has wiped out Rs 2,78,593 crore in market values.

The current Sensex level is below the 200-day (one-year) moving average, indicating further weakness in coming days.

While the Sensex fell well below the 17,000-mark, the National Stock Exchange's Nifty is also below the psychologically important 5,000-mark.

European markets, which opened lower with FTSE (down 1.59 per cent or 93.7 points) and Germany's DAX (down 115.24 points or 1.71 per cent), exacerbated the sell-off in the Indian markets towards the closing hours of the trading session.

The Japanese yen, which advanced to a three-year high versus the dollar on Monday, also forced foreign investors to sell equity in emerging markets such as India. Foreign funds, especially hedge funds, had borrowed cheap money from Japan to invest in booming emerging markets over the past couple of years.

"Monday's market fall had a lot to do with global cues. However, valuations have become attractive and we are advising people to take this opportunity to build up their portfolio in a gradual manner," said Jignesh Shah, Head of Equities, Private Banking, ABN AMRO Bank.

Foreign institutional investors were major sellers in the market, selling equities to the extent of Rs 711.31 crore, making their total sales this year Rs 34,200 crore.

Domestic institutional investors provided poor support, buying equities of around Rs 80.47 crore.

Heavy selling was seen at banking counters with banking biggies such as State Bank of

India (down 8.83 per cent to Rs 1,923.40 a share) -- also the biggest index loser -- ICICI Bank [Get Quote] (down 6.1 per cent to Rs 1024.45 a share) and  Punjab National Bank [Get Quote] (down 9.65 per cent to Rs 545.85 a share).

Morgan Stanley downgraded banks including State Bank of India [Get Quote], Punjab National Bank Ltd, Corporation Bank [Get Quote] and Canara Bank [Get Quote] after they faced lower profitability on account of a cut in lending rates last month.

Financial services stocks such as India Infoline [Get Quote] (down 10.81 per cent to Rs 996.25 a share), Motilal Oswal Financial Services (down 6.53 per cent to Rs 858.7 a share), Religare Enterprises (down 5.73 per cent to Rs 433.90 a share) and Edelweiss Capital (down 9.21 per cent to Rs 774.55 a share) suffered a hit after the market struggled to digest the securities transaction tax set-off against business income.

Volumes in the market continued to suffer as a total of 25.6 million shares and 47 million shares changed hands on the BSE and NSE respectively.

Market breadth remained extremely weak with 396 advances to 2,330 declines.