The Sensex plunged 345 points to 15,491 while the broader Nifty index declined 94.75 points to 4,651.
The sudden reversal was surprising given that the Reserve Bank held interest rates steady in its mid-term policy review today. Analysts said a pause in rate hikes was already factored in by the markets.
"There have been no surprises from the RBI and the bears are piling on their short positions. I wouldn't be surprised if the markets test 4,500 next week," Shardul Kulkarni of Angel Broking said.
Technical analysts predicted further downside for the markets.
"We are in the bear market and we are heading into 2009 lows. The global markets are yet to tank and once that starts, we will be moving in tandem. Stay in cash or go short, buying will lead to blood on your hands," Jai Bala of cashthechaos.com said.
Five stocks - Reliance, L&T, ICICI Bank, HDFC Bank and ITC- contributed over 200 points to the downside on the Sensex in terms of index points.
The declines were led by capital goods stocks that plunged over 4 per cent. Rate sensitive stocks, banks and realty, tanked over 3 per cent. Metal, energy and power stocks declined over 2 per cent.
Defensive stocks - healthcare- were relatively better, falling less than broader markets. Auto and IT stocks saw relative outperformance too.
Cipla and Infosys were the only two stocks to end higher on the Sensex. L&T plunged over 5 per cent. Sterlite and Jaiprakash Associates declined 4-4.5 per cent. BHEL, DLF, SBI, HDFC, Reliance Industries, TCS, NTPC, Coal India and ICICI Bank ended with 3-4 per cent cuts.
On the Nifty, 45 stocks closed in the red. Axis Bank and PNB plunged over 4.5 per cent. GAIL, Dr Reddys, Grasim, Cipla and Infosys ended higher.
The market breadth was extremely weak and over 80 per cent stocks ended lower on the broader BSE 500 index.