The Sensex opened strong at 21,416.67 and rose to an all-time peak of 21,483.74 after the BJP's poll win in three states sparked optimism about the main opposition party's chances in general elections next year.
Afterwards, the 30-share index encountered strong resistance and fell for the next four days. The BSE barometer lost 280.95 points, or 1.34 per cent, over the last weekend's close to settle at 20,715.58. The diversified index scaled historic closing high of 21,326.42 on Monday.
Speculation that US Federal Reserve may soon start cutting back on its stimulus programme, which has proved a boon for emerging markets, including India, and a host of domestic factors severely dented investor sentiment and led the market to snap a two-week rally.
The situation worsened further on Friday after weak factory output data and rise in retail inflation fuelled fears that RBI may hike key interest rates in its December 18 policy meeting.
The Sensex had gained 779.14 points, or 3.85 per cent, in the previous two weeks.
The NSE 50-share Nifty also rose to an all-time high of 6,415.25, but declined afterwards to 6,161.40 before ending the week at 6,168.40, showing a loss of 91.50 points or 1.46 per cent. The key index had gained 264.15 points, or 4.41 per cent, in the last two weeks.
Fall in the rupee value to two-week closing low of 62.12 against the dollar on Friday also weighed on the market. The market reacted negatively to hawkish comments on inflation from RBI Governor Raghuram Rajan as it triggered speculation that he will raise the key lending rate next week.
The Index of Industrial production (IIP) contracted 1.8 per cent in October as compared to an expansion of 1.96 per cent in September and 8.4 per cent a year earlier.
Inflation, as measured by the consumer price index (CPI), rose to a nine-month high of 11.24 per cent in November from 10.17 in October, making it harder for the Reserve Bank to lower interest rates at its upcoming monetary policy meet. Shares of power, capital goods, consumer durable, auto, banking and realty sectors were the main losers of the week, while IT and FMCG segments notched gains.
Barring Japan, other key Asian markets closed in negative following fall on the Wall Street during the week which also put pressure on the Indian bourses.
According to analysts, the markets settled down after the initial euphoria on Monday.
"The mood in the markets was a bit sombre for the better part of the week after the euphoria on the first trading day, triggered by positive mandate given to BJP in the State elections," said Jignesh Chaudhary, Head (Research), Veracity Broking Services.
"Thereon markets traded weak for four consecutive days following a negative trend in global markets on anticipation of a near-term intervention by Fed in the bond purchase programme," he added.
"On the domestic front, a weak rupee, negative IIP numbers and high inflationary numbers did not give any credence to the markets to cheer about. Markets finally ended negative at close on Friday, almost 600 points below its high on Monday.
"There are two important data points which are scheduled to be released next week, which the markets are keenly watching. If FED during its meeting next week, proposes some more near term dates for ending the stimulus program, Indian markets are definitely going to witness some severe jolts next week.
"The technical indicators are suggesting bearish trend and the BSE Sensex is expected to trade in the range of 20,660 to 20,756 and CNX Nifty is expected to trade in the range of 6,000 to 6,150," he added.
Meanwhile, Foreign Institutional Investors (FIIs) invested a net Rs 4,595.08 crore during the week including the provisional figure of December 13.
23 stocks out of the Sensex pack ended lower while others finished higher.
Major losers from the Sensex pack were BHEL (10.65 per cent), Jindal Steel (9.16 per cent), NTPC (8.25 per cent), SBI (6.78 per cent), Tata Motors (5.60 per cent), Bharti Airtel (5.43 per cent), ICICI Bank (5.28 per cent), ONGC (5.03 per cent), L&T (4.48 per cent), Cipla (2.80 per cent), Gail India (2.68 per cent), Bajaj Auto (1.98 per cent), Sun Pharma (1.93 per cent), Tata Steel (1.73 per cent), Hero MotoCorp (1.63 per cent), Hindalco (1.56 per cent) and Tata Power (1.32 per cent).
However, Wipro rose by 4.93 per cent followed by SSLT (4.90 per cent), Infosys (1.40 per cent) and HDFC Bank (1.17 per cent).
Among the S&P BSE indices, Power dropped by 4.60 per cent, CG (4.15 per cent), CD (3.21 per cent), Bankex (2.95 per cent), Auto (2.14 per cent), Oil & Gas (1.94 per cent), Realty (1.88 per cent), HC (1.05 per cent) and Metal (1.00 per cent) while IT index rose by 1.61 per cent.
The total turnover at BSE and NSE fell to Rs 9,744.50 crore and Rs 53,922.87 crore, respectively, during the week from Rs 9,960.86 crore and Rs 54,025.63 crore last week.