The benchmark BSE Sensex tumbled more than 500 points to crack the 26,000-mark in the mid-session trade as participants booked profit after two sessions of gains amid fears of a slowing domestic economy, weak cues from Chinese stock markets and tensions in the Middle East.
The rupee also depreciated against the dollar by 49 paise to 66.545 in and surge in global crude prices hit the market mood.
At 2:29 p.m, the 30-share index was down 496 points or 2 per cent at 25,669 points with all the sectoral indices in the negative. The BSE telecom, which fell about 3 percent, was the biggest loser, with banking (2.4 percent), metals (1.3), real estate (2 percent), oil and gas (1.5 percent), and IT sector (1.3 percent) indices following. The Sensex fall, the biggest since 22 September 2014, comes after a 201 point rise in the previous two sessions. The index had earlier in the day hit 25,601.
The NSE Nifty today declined 156 points or 2 percent at 7,807.
The decline in the early trades was attributed to the weak trend in other Asian markets hit by growing tensions between Saudi Arabia and Iran and weak China data.
Chinese stock markets tumbled 7 percent in their opening session of 2016 on Monday as weak factory activity surveys and falls in the yuan added to concerns about the struggling economy, forcing exchanges to suspend trade for the first time.
The blue-chip CSI300 index ended down 7 percent at 3,470.41 points, while the Shanghai Composite Index lost 6.9 percent to 3,296.66.
Hong Kong's Hang Seng Index was pulled down 3 percent in response and Japan's Nikkei plunged 3 percent.
Worries over domestic economy also added to the decline.
The Nikkei India Manufacturing PMI, a composite monthly indicator of manufacturing performance, dipped from 50.3 in November to 49.1 in December. The PMI has slipped below the crucial level of 50.0 for the first time since October 2013. A figure above 50 represents expansion while a reading below this level means contraction.
According to the monthly survey, Chennai floods triggered significant decline in output and new orders, painting a gloomier picture for the domestic economy. The survey showed that the rate of contraction was the sharpest in almost seven years since the global financial crisis.
With inputs from agencies
Updated Date: Jan 04, 2016 14:41 PM