The Sensex crashed 1,066.33 points or 2.61% to close at 39,728.41, while the Nifty50 fell 290.7 points or 2.43% to end the session at 11,680.35.
The rupee lost value against the dollar falling to 73.38 at close; with the dollar strengthening the currency has depreciated by 25 paise this week so far.
Experts said the dollar was expected to stay strong, at least for a few weeks, in the wake of the US elections on November 3.
The bond markets were calm and the yield on the benchmark bond held steady at 5.9% — a six-year low — after the central bank assured the markets of ample liquidity in its policy statement last Friday. On Thursday, Reserve Bank of India bought bonds worth Rs 20,000 crore.
Wall Street had closed weak on Wednesday and the Asian markets — China, Hong Kong and South Korea — were down between 0.26% and 2.06% on Thursday.
With the European markets opening weak and losing anywhere between 1.8% and 2.18%, the sell-off in the Indian markets accelerated. While India has seen inflows from FPIs of a net $3.07 billion between March and now, the flows continue to be strong in October which has seen an inflow of close to $1 billion in October. This follows an outflow of $767 million in September.