Indian stocks fell the sharpest in almost four months on concerns that a worsening US housing downturn would prompt global investors to shun riskier assets like emerging market equities.

The 30-share Sensex of the BSE plunged 541.74 points, the fifth-steepest fall in the index?s history, to 15,234.57 points. The benchmark index ended the day 3.43% down, after losing as much as 616.63 points intra-day. The 50-share S&P CNX Nifty of the NSE closed at 4,445.20 points, down 174.6 points, or 3.78%. The discount in Nifty August futures from spot Nifty widened to 52.35 points, signifying a build-up of huge short positions. Nifty August futures closed at 4,392.85 points.

Many market players welcomed the correction from overbought positions. The decline in Indian equities, led by Reliance Industries Ltd and ICICI Bank, came close on the heels of a rout across the globe after the US commerce department released a disappointing home sales report. RIL, the nation?s most valuable company, fell Rs 74.55, or 3.8%, to Rs 1,866.45. ICICI Bank, the country?s second-largest lender, dropped Rs 30.85, or 3.3%, to Rs 914.25. The two stocks account for about a quarter of the index?s weight.

In the US, both the Dow Jones Industrial Average and Standard & Poor?s 500 Index fell the steepest since February, while in London the FTSE 100?s biggest drop in four years led declines across Europe. Wall Street suffered one of its worst losses in 2007 as the Dow plunged 311.5 points, or 2.26%, to close at 13,473.57 on Thursday, rattling sentiments in Asian markets and pulling them down by up to 4%.

The Taiwan Weighted was the worst hit, losing 4.22%, or 404.14 points, followed by Seoul Composite that dipped 4.09%. The Nikkei 225 lost 418.28 points, or 2.36%, to close at 17,283.81 points. The Shanghai Composite, however, managed to end on a flat note at 4,345.35 points.

An analyst at a domestic brokerage said if the US sub-prime mortgage and corporate lending markets worsened further, global liquidity would dry up as institutional investors may pull out of riskier assets, especially from emerging markets. Many analysts felt that if the situation in US sub-prime mortgage market worsened, it would have an impact on the Indian market, too.

Sreesankar R, head of research at IL&FS Investsmart, said, ?The correction (in India) is a welcome sign as the market has moved in a single direction for the last couple of sessions. Overbought stocks corrected sharply on Friday.?

Market capitalisation declined 3.41% as investors lost Rs 1,57,115.15 crore in notional wealth in a single day. The market capitalisation of all shares listed on the BSE sank to Rs 4,44,808.93 crore on Friday from Rs 4,601,924.08 crore on Thursday.

Provisional data provided by stock exchanges showed FIIs were net sellers of assets equivalent to Rs 1,475 crore in India. But domestic financial institutions took advantage of the market fall to buy stocks worth Rs 727.32 crore on Friday.

Arun Kejriwal, director of Kris Capital, said, ?The Indian market was in an overbought zone. The correction is good for the market.?

The market breadth on the BSE was negative. As many as 570 stocks advanced while 1,951 ended on a weaker note. Among Sensex constituents, 27 stocks declined and only 3 stocks managed to gain ground.