Besides profit-booking in metal, banking, realty and oil & gas shares, the rupee slumping to near five-month lows of 61.41 (intra-day) against dollar also soured sentiment.
In oil trade, the benchmark West Texas Intermediate (WTI) for September delivery rose 10 cents to USD 97.48 while Brent crude gained 25 cents to USD 104.86 in afternoon trades.
The BSE Sensex index, which rose over 427 points in previous two sessions, started the day on a negative note and continued to decline as selling in blue-chips weighed. It settled 242.74 points down, or 0.94 per cent, at 25,665.27.
Intra-day, the index touched a high of 25,901.68 and a low of 25,621.85.
Overall, 23 constituents of 30-share Sensex fell while seven like RIL, BHEL, Hero Moto and Hindustan Unilever rose.
The 50-share NSE index Nifty dipped below the 7,700-mark by falling 74.50 points, or 0.96 per cent, to end at 7,672.05 after moving between 7,740.95 and 7,658.95 during the day.
Asian stocks dropped following a sharp fall on Wall Street over fears of a market correction and concerns the conflict in Ukraine could escalate. European indices were down 1-1.4 per cent in afternoon.
Banking counters, including SBI, ICICI Bank, Axis Bank, HDFC Bank, retreated largely on profit-booking at prevailing levels and worries that a sell-off in government bonds would hit portfolio value of their debt holdings.
The falling trend was cushioned to some extent as IT stocks such as Infosys surged 2.01 per cent and Wipro gained 0.31 per cent as a weaker rupee improves their earnings.
Sectorally, the BSE metal sector index suffered the most by losing 1.90 per cent, followed by Banking (down 1.82 per cent), Realty (1.25 per cent) and FMCG (1.24 per cent). Bucking the overall trend, IT index rose 0.67 per cent.
Meanwhile, Foreign Portfolio Investors bought shares worth a net Rs 52.85 crore yesterday.
* BSE index falls 0.94 pct; NSE index down 0.96 pct
* Interest-rate sensitive stocks fall on profit-taking
* Shares tracking weak global cues, sell-off in govt bonds
Indian shares end lower; banks fall
(Reuters) Indian shares fell more than 1 percent on Wednesday, snapping two days of gains, as lenders such as State Bank of India and ICICI Bank slumped on worries that a sell-off in government bonds would hit the value of their debt holdings.
A slump in global shares also dented sentiment after Wall Street fell overnight and on reports of a build-up of Russian troops near the border with Ukraine.
The falls mark a cautious start to the month in Indian shares after a record-setting July. The NSE index is down 0.6 percent so far this month, given concerns that weaker global markets will lead to reduced buying by foreign investors.
Overseas investors, who bought Indian shares worth $8.68 million on Tuesday, have sold shares worth $363.48 million so far this month. Foreign investors have bought $11.79 billion so far this year.
"Markets are likely to be choppy for the time being. Earnings are coming to an end. There is a lack of fresh triggers. It would be more of news-driven kind of movement for the time being," said Daljeet S Kohli, head of research at IndiaNivesh.
"However, the broader sentiment is still positive."
The benchmark BSE index ended 0.94 percent lower at 25,665.27 points, while the broader NSE index ended 0.96 percent lower at 7,672.05 points.
Banking stocks led the decline after bonds tumbled on Tuesday, raising worries about their debt holdings.
The Reserve Bank of India had earlier on Tuesday cut the banks' minimum bond holding requirements, known as the statutory liquidity ratio (SLR), as well as the debt that must be held-to-maturity (HTM) by lenders.
The existing benchmark 10-year bond yield surged 10 basis points to 8.83 percent, its biggest single-day rise in four months, on Tuesday and an additional 2 bps on Wednesday.
State Bank of India fell 1.93 percent, after gaining 0.5 percent in the previous session, while ICICI Bank Ltd ended down 2.7 percent.
Real-estate stocks were also hit by profit-taking. DLF Ltd fell 1.4 percent after gaining 2.2 percent in the previous session, while Indiabulls Real Estate closed down 5.6 percent.
Among other blue-chips, Tata Motors ended 2.02 percent lower on profit-taking after gaining 2.3 percent on Tuesday.
Hindalco Industries closed 1.99 percent lower, while Oil and Natural Gas Corp. fell 2.1 percent.
However, Infosys Ltd gained 1.8 percent, adding to its 1.4 percent gain in the previous session, after former officers of the IT outsourcer wrote a letter calling for a 112-billion-rupee (1.82 billion US dollar) buyback.
FACTORS TO WATCH
* Euro hurt by German industrial data, Ukraine worries
* Oil rebounds towards $105 from 9-month closing low
* Russia worries, weak German data weigh on Europe
* Foreign institutional investor flows