The benchmark BSE Sensex dropped 240.17 points or 1.35% to 17,534.09, while the 50-share NSE Nifty slipped 77.35 points or 1.45% to 5,256.15. Only three of the Sensex 30 stocks closed with gains.
The fall was led by Chinas Shanghai Composite Index, which fell 4.3%, most since May 17. Other major Chinese indices dropped over 5%. Most other Asian markets, too, closed more than 1% lower.
Sentiments worsened after the US economic board said Chinas leading economic indicator rose 0.3% in April, correcting a previous reading of a 1.7% reported on June 15.
Most European markets were also down with Euro Stoxx 50, the benchmark index of the European region, slipping 3%. Market participants were cautious ahead of bank repayments of emergency loan to the European Central Bank later this week.
In the long run, it is the performance of the economy that counts, said Sandip Sabharwal, CEO - portfolio management services, Prabhudas Lilladher.
As the negative news flow from Europe keeps on reducing over the next few months, we could see the markets move up, he added.
Markets also fell as investors booked profits as the bourses had climbed to a one-week high. However, after Tuesdays fall, markets pared gains to close at lowest level since June 16.
Sabharwal, however, is bullish about Indias prospects. The market is looking well-positioned for a further upside. Economic recovery is quite rapid and earnings growth for the first quarter should be quite positive, he said.
The overall market breadth was negative as only 1,129 stocks advanced, while 1,728 declined on the BSE. The BSE Mid-cap and Small-cap indices dropped 0.65% and 0.62% respectively. All of BSEs sectoral indices closed negative with the metal index dropping the most at 2.74%, followed by realty, which declined 1.55% and bankex, which slid 1.47%.
Metal stocks fell as copper and zinc prices fell the most in three weeks, while fear of rate hike pulled down banking stocks. RBI deputy governor KC Chakrabarty said on Monday that interest rates may be increased before July 27 monetary policy review by the Reserve Bank.
The metal companies led the decline on the 30-share Sensex.