The Sensex and the Nifty shed over 1.04 per cent at the end of the session on Wednesday owing to heavy selling in banking, capital goods, consumer durables and metal stocks.
Domestic sentiment was dampened after the Reserve Bank of India had yesterday announced additional liquidity tightening measures to check the rupee slide.
The 30-share BSE index Sensex was down 211.45 points (1.04 per cent) at 20,090.68 and the 50-share NSE index Nifty was down 87.3 points (1.44 per cent) at 5,990.50.
Among BSE sectoral indices, banking and consumer durables indices succumbed to heavy selling pressure and were down 4.61 per cent and 3.13 per cent, respectively, followed by capital goods 2.98 per cent and metal 2.09 per cent.
On the other hand, IT and TECk found investors' support and were up 1.03 per cent and 0.99 per cent, respectively.
Among 30-share Sensex, Bharti Airtel, Wipro, TCS, Sun Pharma and Cipla were the top five gainers, while the top five losers were Jindal Steel, L&T, ICICI Bank, HDFC Bank and SBI.
European stocks rose, after the benchmark index fell from a seven-week high, as companies from Volvo AB to EasyJet Plc released financial results.
Stoxx 50 was up 24.05 points or 0.88 per cent at 2,746.95, FTSE 100 rose 40.96 points or 0.62 per cent to 6,638.40 and DAX climbed 56.63 points or 0.68 per cent to 8,370.86.
Asian shares were down, with the regional benchmark index retreating from a two-month high, after a data showed China’s factory output dropped in July.
Initial reading of 47.4 for Purchase Managers Index by HSBC showed that the manufacturing output in China fell to an 11-month low.
In the Asian trade, Nikkei fell 109.32 points or 0.74 per cent to 14,669.20, Hang Seng shed 62 points or 0.28 per cent to 21,853.40 and S&P/ASX 200 was up 17.89 points or 0.36 per cent at 5,035.
Also, investors remained cautious as they have to wait until September for the US Federal Bank to reveal its intentions on the $85-billion-a-month stimulus package.