The BSE benchmark Sensex closed at 20,229.05, down 406.08 points -- its biggest fall since September 3 when it had lost 651.53 points.
The Sensex had fallen by 256 points yesterday.
The broad-based National Stock Exchange index Nifty ended 123.85 points down at at 5,999.05.
In-line with the weak broader market, the total investor wealth dipped by Rs 1.18 lakh crore to Rs 66,38,849 crore.
Following the market crash, all the 30-Sensex components closed the day with losses, with Sesa Sterlite Ltd falling 3.91 per cent, becoming the worst performer among the blue-chips.
Further, the 13 BSE sectoral indices also saw severe selling pressure and ended the day lower, with banking, capital goods and realty index taking the biggest hit.
"The FOMC view on tapering was not well received by the markets. However, what will happen going forward will be decided by how the USD INR rates move. If the USD/INR rise from here and move toward 65 levels, we would see more selling pressure in the broader markets," said Milan Bavishi, Head Research, Inventure Growth and Securities.
Yesterday's release of the minutes of Fed's October meet spooked global markets as it signalled tapering of the USD 85 billion monthly bond buying could happen "in coming months" if the economy improves as anticipated.
As many as 1,552 stocks declined in the market, while 922 advanced. Eighty-two stocks hit their 52-week low on the BSE, while 19 touched their one-year high peak.
"Weaker global cues and profit-booking at higher levels has led to strong selling pressure," said Rakesh Goyal, Senior Vice President, Bonanza Portfolio Limited.