Data showing the country's service sector output again falling in December and negative cues from global markets also affected the domestic sentiment, traders said.
However, midcap and smallcap shares continued to outshine its larger peers.
The 30-share BSE Sensex fell 64.03 points, or 0.31 per cent, to 20,787.30 as 21 constituents ended in the red. Intra-day, it had touched the low of 20,721.98. Tata Power, State Bank of India (SBI) and Hero MotoCorp were among the biggest losers.
The BSE benchmark has now lost over 383 points in this calendar year and is yet to close on a positive note so far.
The 50-share NSE index Nifty closed down 19.70 points, or 0.32 per cent, to end at 6,191.45. However, SX40 index of MCX Stock Exchange ended 6.29 points up at 12,390.96.
Earlier today, the HSBC/Markit Purchasing Managers Index for the services industry fell to 46.7 in December from 47.2 in November, registering the sixth consecutive monthly drop in output levels.
Later, government data showed gross direct tax collections rose 12.33 per cent to Rs 4.81 lakh crore during the first nine months of this financial year.
Infosys, which fell 1.44 per cent, is the first among bluechips to kick off December quarter earnings when it releases earnings on January 10.
The rupee continued to be sluggish and was last trading at 62.35 levels against the dollar when stock markets closed.
The BSE Midcap index closed 0.35 per cent higher while the Smallcap barometer jumped 0.95 per cent.
In the smallcap space, Mastek shares surged over 11 per cent on ahead of the January 8 board meet to consider equity buyback. Financial Technologies jumped more than 10 per cent.
Sectorally, the BSE Banking sector index suffered the most by losing 1.13 per cent, followed by Realty index (0.71 per cent), IT index (0.49 per cent), Power index (0.41 per cent) and Oil & Gas index (0.21 per cent).
* BSE index falls 0.31 pct; NSE ends 0.32 pct lower
* Power producers fall on media report about tariff cut
* L&T falls for 4th day on order book worries
BSE Sensex continues to retreat; caution ahead of results, data
(Reuters) Indian shares fell to their lowest close in 2-1/2 weeks on Monday, and have now declined in each of the four trading sessions of the year as caution prevailed ahead of financial results and key inflation data.
Also, foreign institutional investors sold 6.08 billion rupees ($97.7 million) worth of index futures and 180 million rupees of cash shares on Friday, dampening the sentiment.
Losses on Monday also tracked lower Asian shares after growth in China's services sector slowed sharply last month, raising concerns about the pace of recovery in the world's second-largest economy.
For India, the HSBC Services Purchasing Managers' Index INPMIS=ECI, compiled by Markit, showed a continued contraction in activity, falling to 46.7 in December from 47.2 in November as new orders dwindled, although firms hired at their fastest pace in five months.
The BSE benchmark index has now fallen 1.8 percent this year wiping out the entire gains made in the previous month. Infosys Ltd is due to report October-December results on Friday, informally kicking off the results reporting season for blue chips.
India is due to post wholesale and consumer prices data next week, which will help determine whether the Reserve Bank of India will resume raising interest rates after tightening monetary policy by a total of 50 basis points over September and October.
"October-December earnings season would be about stock-specific stories. We have to watch out for management comments this season to establish whether ground realities have changed or not," said Dipen Shah, head of private client group research at Kotak Securities.
Expect market to consolidate more as optimism around reforms and rupee stability are getting matched by fiscal and inflationary problems, Shah added.
The benchmark BSE index fell 0.31 percent, or 64.03 points, to end at 20,787.30, marking its the lowest close since Dec. 19. The broader NSE index lost 0.32 percent, or 19.70 points, to end at 6,191.45, closing below the psychologically important 6,200 level.
Sentiment was also dampened after foreign institutional investors sold 6.08 billion rupees ($97.7 million) worth of index futures and 180 million rupees worth of cash shares on Friday.
Among the blue chip shares, ICICI Bank Ltd fell 2.4 percent, while Reliance Industries Ltd ended down 1.1 percent.
In state-owned large cap banks, State Bank of India fell 1.8 percent while Bank of Baroda Ltd ended 1.9 percent lower. Larsen and Toubro Ltd fell 0.2 percent, losing for a fourth consecutive session, with a total decline of 5.6 percent, on concerns that the company's new orders are slowing down, dealers say. Infosys Ltd fell 1.3 percent after making a record high at 3,580.50 rupees on profit-taking and caution ahead of its October-December results on Friday.
Power producers fell on media reports that the state government in Maharashtra, home to Mumbai, is planning to cut power tariffs.
Tata Power Co Ltd fells 2.6 percent, while Reliance Infrastructure Ltd ended lower 0.5 percent. However, among stocks that gained, Lupin Ltd gained 0.6 percent, adding to Friday's 3 percent rise on hopes of regulatory approval for its request for permission to raise its foreign investor stake.
The Foreign Investment Promotion Board is due to meet this week and dealers cite expectations the regulator could consider Lupin's proposal.
FACTORS TO WATCH
* Yen pulls away from lows as stocks fall
* Oil recovers over $107 after Libya oilfield restart
* Asian shares tumble to 3-week low on China PMI
* Foreign institutional investor flows