Led by escalating tensions in West Asia after Saudi Arabia and its Gulf Arab allies launched air strikes in Yemen, the Sensex and the Nifty fell over 2.2 per cent on Thursday to their lowest in more than 10 weeks.
The air strikes were launched to counter Iran-allied forces besieging the southern city of Aden where the US-backed Yemeni president had taken refuge.
Blue-chips slumped on worries foreign investors may trim positions on risk aversion due to Yemen air strikes.
The BSE index Sensex tumbled 654.25 points or 2.33 per cent at 27,457.58 and the NSE index Nifty dropped 188.65 points or 2.21 per cent at 8,342.15.
Barring capital goods, all other BSE sectoral indices ended significantly in the red. Among them, IT index fell the most by 2.63 per cent, followed by banking 2.52 per cent, metal 2.24 per cent and TECk 2.04 per cent, while capital goods index was up 0.08 per cent.
Blue-chips heavily owned by foreign investors led the falls. Major Sensex losers were HDFC 5.32%, Wipro 4.01%, SSLT 3.9%, Infosys 3.3% and SBIN 3.18%, while the only four gainers were Bharti Airtel 0.98%, GAIL 0.45%, Hero MotoCorp 0.29% and L&T 0.18%.
Tensions in West Asia come at a time of rising concerns that foreign investors will pare some of their positions in India. Overseas funds sold index futures worth Rs 1,386 crore ($221.2 million) on Wednesday ahead of monthly derivative expiry and end of the fiscal year.
European shares fell on Thursday, with the London Stock Exchange leading the market lower on news that Borse Dubai will sell its full stake in the company and ARM Holdings extending the previous session's steep losses, tracking its weaker US peers.
The pan-European FTSEurofirst 300 index was down 0.9 per cent at 1,572.27 points by 0817 GMT, after falling more than 1 per cent in the previous session.
Asian shares also fell after Saudi Arabia and Gulf region allies launched military operations including air strikes in Yemen on Thursday to counter Iran-allied forces besieging the southern city of Aden where the US-backed Yemeni president had taken refuge.
"We think the market will drag for some time. There is a huge currency risk. And there are no near-term triggers," said Deven Choksey, managing director, KR Choksey Securities.
A report by SMC Investments and Advisors said: "Asian stocks slid following the US stocks as dearth of activity in markets failed to provide support. US stocks ended low as decelerating growth and declining dollar led to a sell off. With orders for transportation equipment showing a notable pullback, the Commerce Department released a report showing that new orders for USmanufactured durable goods unexpectedly decreased in the month of February. The report said durable goods orders fell by 1.4 per cent in February following a downwardly revised 2.0 per cent increase in January. The drop in orders came as a surprise to economists, who had expected orders to climb by 0.7 per cent compared to the 2.8 per cent jump that had been reported for the previous month.''