The Nifty index also recorded a sharp decline of 20.35 points to close at 956.15 points.

Rumours continued to play havoc in the markets, with sentiments dipping to the lowest ebb. The rumours primarily pertained to a operators obtaining stay on the SEBI move to curb short selling. This rumour was proved to be wrong as no case was filed. There was also concern about the payment defaults even as the pay-in of securities was going on at the Bombay Stock Exchange.

To top it all the release of Wednesday's institutional business figures by the National Stock Exchange, for the first time, further unnerved sentiment, as it showed that the total FII sales were to the tune of Rs 41 crore on June 17, while that of local institutionsstood at Rs 2 crore. On Thursday, FIIs had net sales of Rs 50.88 crore on NSE while domestic institutions and mutual funds were net buyers to the extent of Rs 33.42 crore.

"SEBI's move to help the bulls out of the crucial phase could create a spiral trap for the bears," said a technical analyst with a leading FII brokerage firm.

"The regulator must remember that the market cannot survive when one particular segment is deprived of the hedging facility. Such a move could make the market hollow and would be more driven by rumours rather than market forces," he explained.

According to fund managers, while FIIs had started reducing their exposure at 3100 level as a means to cut short their losses, the 3400 level would be an ideal phase to book profits and even further shorten their losses.

On Thursday's trading, even though the Sensex touched an intra-day's high of 3,434.46, some UK-based FIIs were rumoured to have pressed huge sales which saw the index moving in the southward direction in the absence ofsubstantial support by the domestic institutions.

According to market sources, FIIs were rumoured to have dumped huge chunks of MTNL, HLL, SBI and Telco which saw these stocks fall by over 5 per cent.However select FII buying at the counters of Dr Reddy and German Remedies was also reported at a later stage. UTI was rumoured to have bought huge chunks of Hindalco, after it bought over 40 lakh shares of SAIL in the past three trading sessions on the BSE.

Although BSE top brass kept assuring the brokers about the exchange's financial health, market was agog with rumours that the pay-in conducted on June 18 would not be smooth as since five brokers were still facing financial problems. FIIs continued to caution clients about abstaining from the market till the impact of sanctions was known and also the second half performance of corporates started flowing in.

"Since the US is supposed to explain the scope of the sanctions imposed on India, we had advised our clients not to wait till the next settlementwhich commences on June 22," said a fund manager.

Kerb dips further

Rumours about the BSE's payment crisis continued to dampen sentiments of market players. Pivotals continued to be quoted at a discount of 2 per cent to the official closing on the BSE. The excellent performance of SBI which which was announced after the market closed at 3.30 pm saw the stock being quoted at Rs 214 during the initial phase of the kerb session fell to a low of Rs 209.50 at 7.30 pm. Similarly, pivotals like Reliance and ITC were quoted at Rs 144.50 (Rs 146.80 ) and Rs 651.50 (Rs 659) respectively. Volumes continued to remain remotely thin at the kerb session.