Profit-booking by wary investors due to expiry of futures and options contract on Thursday and fresh capital outflows also affected the market sentiment.
The sentiment further dampened after the Indian rupee slipped past the 63-mark versus dollar.
Almost all sectors witnessed selling pressure, led mainly by interest rates related stocks from Realty, banking and Auto segments. Metal and Power sectors also suffered losses.
Small-cap and Midcap sectors also dropped on profit- booking from retail investors as these indices fell by 2.81 pct and 2.28 per cent, respectively.
The Sensex resumed lower at 20,899.03 and fell further to more than two-month low of 20,343.78 before settling the week at 20,513.85, still showing a loss of 619.71 points or 2.93 per cent. It had gained by 375.07 points or 1.81 per cent in the previous two weeks.
The NSE 50-share Nifty also dropped by 177.25 points or 2.83 per cent to end at 6,089.50. It had also risen by 95.30 points or 1.54 per cent in the previous two weeks.
The BSE benchmark, which touched a two-month intra-day low after RBI increased the short-term lending rate by 0.25 per cent, was hit by a sharp 8 per cent drop in Maruti Suzuki India shares after announcing quarterly earnings.
Jignesh Chaudhary, Head of Research, Veracity Broking Services said: "Indian equity markets were burdened by Fed's decision to trim the bond buying programme by a further USD 10 billion. This resulted in weak trading in all the markets of the emerging economies and Indian markets too followed suit."
Contraction in Chinese manufacturing was also among the factors behind drop in Asian markets.
Foreign Institutional Investors (FIIs) sold net worth Rs 3,215.97 crs during the week as per the figures issued by the SEBI's, including the provisional figure of January 31.
Major losers were Maruti Suzuki 7.74 per cent, Axis Bank 7.24 per cent, SSLT 7.03 per cent, HDFC bank 6.68 per cent, Icici Bank 6.56 per cent, SBI 5.94 per cent, Tata Motors 5.57 per cent, Tata Steel 5.39 per cent, RIL 4.57 per cent, Coal India 4.03 per cent, NTPC 3.95 per cent, Hindalco 3.86 per cent, Hero Motocorp 2.72 per cent and Sun pharma 2.41 per cent.
Among the S&P BSE indices, Realty dropped by 7.31 per cent followed by bankex 6.72 per cent, Metal 4.71 per cent, Auto 3.21 per cent, Power 2.76 per cent, PSU 2.61 per cent and Oil&Gas 2.23 per cent.
Total turnover and BSE and NSE rose to Rs 10,756.26 crore and Rs 60,496.76 crore, respectively from Rs 10,185.66 crore and Rs 52,515.73 crore last week.