Federal Reserve's move has thrown financial markets into a spin.
It's likely that prices may have much further to fall as investors rush to liquidate.
Most Asian currencies are on a slide on worries about the withdrawal of US stimulus.
The Nifty too closed lower by 80.75 points, or 0.73 per cent, at 11,049.65 after hitting a low of 11,033.90.
Jindal Steel top loser among the Sensex stocks, slips 10% in the intra-day deals.
There is a general meeting of minds among observers on the difficulty of positive factors breaking through.
Markets will watch the policy meeting on June 18 and 19 for clues to a rollback of stimulus measures. Fed officials are divided over their ultra-easy monetary policy and some warn it could stoke future inflation and financial instability.
One culprit behind the poor recent performance of emerging markets is growing bond market volatility and the knock-on effect that that may be having on so-called carry trades, under which investors borrow money cheaply in one currency and then invest it for what they hope will be higher returns elsewhere.
Asian stock, bond and currency markets took another big hit after a fresh spike in US interest rates re-ignited concerns about capital flows from the region and forced investors to pare back their Asian portfolios.
The Bombay Stock Exchange benchmark Sensex has lost 478.60 points, or -2.80 per cent, to slip to 16,586.55 in afternoon trade on Thursday amid panic selling in markets worldwide following the US Federal Reserve's warning that the outlook for the world's largest economy is grim.
With rupee plunging to life-time low of 57.54 verus dollar, the Finance Ministry on Monday said there is an unwarranted panic in the market and hoped it will settle down in a some time.
