The benchmark BSE index Sensex ended down by nearly 170 points as traders remained wary ahead of IIP and inflation data due later in the day.
Domestic investors were also cautious ahead of the US Federal Reserve policy meeting this week.
The 30-share BSE index Sensex ended lower by 166.36 points or 0.53 per cent at 31,095.70 and the 50-share NSE index Nifty closed down 51.85 points or 0.54 per cent at 9,616.40.
Among BSE sectoral indices, capital goods index fell the most by 1.58 per cent, followed by consumer durables 1.32 per cent, banking 1.02 per cent and auto 0.73 per cent. On the other hand, IT index was up 0.42 per cent, healthcare 0.26 per cent and TECk 0.18 per cent.
Top five Sensex gainers were Infosys (+1.6%), Sun Pharma (+1.59%), HUL (+0.42%), Cipla (+0.41%) and GAIL (+0.24%), while the major losers were L&T (-2.29%), Tata Motors (-2.29%), Wipro (-1.95%), ICICI Bank (-1.88%) and Bajaj Auto (-1.37%).
Inflation is expected to have cooled to a new record low of 2.60 per cent in May, a Reuters poll found, which could add pressure on the Reserve Bank of India to cut interest rates later in the year.
Asian markets were also lower - with MSCI's broadest index of Asia-Pacific shares outside Japan down 0.8 per cent - as shares of electronic products makers fell on caution ahead of the Fed, which is expected to raise rates and signal further increases this year.
“The market has been moving up for quite sometime and it needs to consolidate,” said Arun Kejriwal, founder of Kejriwal Research & Investment Services, adding that the fall in banking and IT stocks was owing to profit booking.
Asian stocks edged lower early on Monday following a slide by US technology shares and the dollar rose ahead of this week's US Federal Reserve policy meeting, with markets hoping for more guidance on the central bank's interest rate path.
MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.1 per cent following a mixed day Friday on Wall Street where the Nasdaq slid 1.8 per cent on tumbling technology shares but the Dow closed at yet another record high. MSCI's Asia-Pacific index was still in reach of a two-year high scaled late last week.