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The NSE index fell 1.6 per cent on Tuesday, posting its first drop in three sessions, as investors booked profits in banks and capital goods stocks, while the sentiment was also hit after exports shrank in January for a 14th straight month.
Shares extended some losses in the afternoon session after Qatar said four of the world's largest producers agreed to freeze their output at January levels, provided other major exporters followed suit.
India imports two-thirds of its energy needs and could be hurt by higher oil prices.
The 30-share BSE index Sensex ended lower by 362.15 points or 1.54 per cent at 23,191.97 and the 50-share NSE index ended down by 114.7 points or 1.6 per cent at 7,048.25.
Among BSE sectoral indices, capital goods index fell the most by 3.06 per cent, followed by realty 3.03 per cent, oil & gas 2.32 per cent and healthcare 2.27 per cent.
Top five Sensex losers were State Bank of India (-6.49%), Tata Motors (-4.88%), BHEL (-4.35%), GAIL (-3.76%) and L&T (-3.59%), while the major gainers were Adani Ports (+4.78%), NTPC (+2.12%), Dr Reddy's (+0.16%) and Wipro (+0.13%).
The NSE index surged 2.6 per cent on Monday, its biggest single-day percentage gain in more than a year, as state-run banks recovered from recent losses, but analysts warn overall sentiment remains weak due to poor corporate earnings and caution ahead of the 2016/17 Budget due on February 29.
"It is largely to do with good amount of short-covering that had happened yesterday and that had propelled the rally in the market," said Deven Choksey, managing director of KR Choksey Securities.
"I doubt there was any genuine aggressive buying yesterday."
The selling momentum continued for foreign portfolio investors as they net sold shares worth Rs 1,311.59 crore yesterday.
European stock markets were steady on Tuesday, kept afloat by stronger energy stocks which rose as oil prices climbed on the possibility of output cuts.
The pan-European FTSEurofirst 300 index rose 0.2 per cent, building on a 6 per cent rise made over the last two sessions.
Asian shares extended gains on Tuesday as a combination of stabilising Chinese markets, rebounding oil prices and solid US consumption data prompted investors to look for bargains after last week's rout.
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