Markets traded off the day's low after falling sharply in early trade, when the Sensex had slumped over 200 points and the Nifty had slipped below the 5,550 mark.
On Tuesday, Trinamool Congress quit the ruling UPA alliance to protest against hike in fuel prices and the decision to allow foreign investment in the retail sector. Trinamool's decision has left the ruling coalition is in a minority.
However, most market analysts did not view the development as negative fallout for markets.
Manishi Raichaudhari of BNP Paribas said there may not be an immediate threat to the government and the political development may be a positive in the long term.
Saurabh Mukherjea of Ambit Capital said multiple smaller parties may drive a bargain with the Congress and UPA II will have enough fire power to push more reforms.
Metal, energy, power, realty, and capital goods stocks saw over 1 per cent cut. But retail and aviation stocks saw sharper cuts.
Pantaloon Retail traded 2 per cent lower. Kingfisher Airlines slumped 7 per cent while SpiceJet traded 3.7 per cent lower.
On the Nifty, 35 of the 50 stocks traded lower. State-run gas utility Gail led the losses, down 4.1 per cent. Heavy equipment maker BHEL, Anil Ambani promoted Reliance Infra, and Vedanta group miners Sterlite and Sesa Goa traded 3 per cent lower.
State-run oil refiner BPCL gained over 2 per cent on falling global crude prices. IT major TCS rebounded nearly 2 per cent after the sharp fall in the last three days. Car maker Maruti and mobile carrier Bharti Airtel were the other stocks that traded with over 1 per cent gains.
The market breadth was weak with only 30 per cent stocks managing to advance on the broader BSE 500.
Asian shares extended losses after data indicated little respite for Chinese manufacturers, suggesting growth in the world's second-largest economy slowed further in the third quarter. European markets also traded in the red.
(With inputs from Reuters)