In addition, a depreciating rupee which was trading 44 paise, or 0.73 per cent, down at 59.69 against the US dollar in forex market, dampened equity market sentiments.
The BSE index had risen to a day's high of 25,688.31 in early trade after yesterday government data after trading closed showed that retail inflation eased to 8.28 per cent in May and factory factory output growth rebounded to 13-month high of 3.4 per cent in April.
However, emergence of selling, spread across 11 of 12 major sectors, pushed back the Sensex to end lower by 348.04 points, or 1.36 per cent, at 25,228.17. Intra-day, it touched a low of 25,171.61. In the 30-share index, 26 shares declined led by Axis Bank, Tata Steel and Hero MotoCorp.
Today's drop is the biggest for the Sensex since January 27 when it had slipped 426.11 points on uncertainty ahead of RBI meeting and a global sell-off linked to US tapering fears.
The gauge had gained almost 110 points in yesterday's session on hopes of favourable IIP and retail inflation data.
Besides realty, stocks of oil and gas, power, capital goods, PSUs, consumer durables, metals and banking led losses.
Similarly, the National Stock Exchange index Nifty tumbled 107.80 points, or 1.41 per cent, to 7,542.10 after dipping to 7,525.35. It had surged to 7,678.50 in early trade.
In the 50-share Nifty, as many as 42 constituents fell.
"Markets witnessed heavy selling pressure following concerns over higher oil prices, which was trading near USD 113.86 per barrel. Rising tensions in Iraq is major reason for this sudden rise in crude oil," said Rakesh Goyal, Senior Vice President, Bonanza Portfolio.
The BSE Realty index suffered the most losing 5.24 per cent as DLF, DB Realty, HDIL, Unitech, Omaxe, Oberoi Realty, and Indiabulls Real Estate fell up to 9 per cent.
Bucking the general weakening trend, IT index ended 0.13 per cent higher with Infosys gaining 0.48 per cent.