With FIIs booking profits ahead of the holidays, the benchmark index widened the losses in the afternoon trade. The selling pressure in frontline stocks has also caught up with the midcaps and smallcaps.
Asian stocks slumped in thin trade Tuesday after an interest rate cut in China disappointed investors and Wall Street finished lower.
The Sensex has fallen 206 points to 9,7772 while Nifty is down 58 points to 2,980.
Selling pressure is seen across the sectors, with banking and consumer durables the most hit.
Among the Sensex stocks, JP Asso has plunged over 9 per cent on concerns of equity dilution after the board approved merger of its subsidiaries in the hotel, cement, real estate and construction businesses. L&T, Sterlite Ind, Tata Motors and Satyam Computer are down over 4 per cent.
South Korea's Kospi fell 3.3 per cent, Australia's benchmark lost 1.6 per cent and Taiwan's key index retreated 3.4 per cent. Japan's market was closed for a national holiday.
Hong Kong's Hang Seng Index dropped 2.9 per cent, while Shanghai's main index shed 3.5 per cent. Both markets came under pressure after China's central bank said Tuesday its benchmark one-year lending rate will fall by 0.27 percentage point to 2.25 per cent.
It was the fifth cut in four months, part of Beijing's recent efforts to revive economic growth amid the global downturn. But some investors had anticipated a cut of 0.5 percentage point, analysts said.
After rallying off last month's lows, the markets were succumbing to selling as many investors moved to close out their positions before the end of one of the most tumultuous years in decades.
"There's a lot of profit-taking before the holiday," said Ben Kwong Man Bun, the chief operating officer at KGI Securities in Hong Kong. "People believe the upside will be very limited for now. The global economy is facing a huge problem."
The lurch downward came after Wall Street fell overnight.
U.S. market futures were down slightly, suggesting Wall Street would open lower.