Sensex and Nifty fell for a fifth consecutive session on Thursday to two-week lows as concerns about protracted negotiations to avoid a U.S. "fiscal cliff" hit software services exporters such as Tata Consultancy Services and Infosys.
Investors also booked profits in recent out-performers such as Tata Motors , with the euro zone also expected to remain a persistent concern after data on Thursday showed the region falling into recession during the July-September quarter.
Worries at home are also expected to prevail despite data on Wednesday showing the wholesale price index eased, as headline inflation is still high enough to be a headache for policymakers struggling to balance the need for growth with taming prices.
Analysts said markets may remain vulnerable unless the government announces additional economic and fiscal reforms, given the central bank has indicated it won't cut interest rates until the January-March quarter of 2013.
"Fiscal cliff is more of fancy words but implementation of reforms by the government would be the next big trigger," said Vijay Kedia, a director at Kedia Securities.
The Sensex fell 0.79 percent, or 147.50 points, to end at 18,471.37 points, marking its lowest close since October 30.
The Nifty fell 0.63 percent, 35.95 points, to 5,631.00 points, marking its lowest close since October 31.
Both indexes have fallen for five consecutive sessions including shortened Diwali trading hours on Tuesday. Markets were closed on Wednesday for a public holiday.
Software services exporters, which derive more that half of their revenues from the United States, were among the leading decliners.
Tata Consultancy Services fell 2.4 percent, while Infosys fell 1.8 percent.
Metal stocks also fell tracking weaker prices of the commodity at the London Metal Exchange. Hindalco Industries fell 1.9 percent, while Sterlite Industries fell 1.6 percent. Tata Steel fell 2.7 percent.
Investors also booked profits in recent out-performers. Tata Motors fell 1.9 percent after surging 9 percent so far this month as of Tuesday's close, outperforming a 0.84 percent gain in the broader NSE index.
Tata shares fell even after the auto maker said global sales rose 6 percent in October, including a 7 percent rise at key unit Jaguar Land Rover.
ITC fell 2.6 percent. The cigarette maker has surged 41 percent so far this year as of Tuesday's close. Dealers also cited some concerns about increased regulatory scrutiny for tobacco as a reason for Thursday's falls.
United Phosphorus fell 1.7 percent, while GMR Infrastructure dropped 4.2 percent after both were removed from the MSCI India index by the index compiler. The changes will take place as of the close of trade on November 30.
However, among gainers, wireless services providers gained after an auction of 2G airwaves attracted less demand than targeted by the government, leading to lower prices that are giving a respite to the debt-ridden industry.
Bharti Airtel gained 2.6 percent, while Idea Cellular rose 3 percent.
DLF surged 3.2 percent - recovering after concerns about its July-September earnings had sent the stock down 5.2 percent over the previous three sessions - after the company's management guided for an improvement in profitability, according to analysts.
The property developer said later in the day it would aim to sell its Aman Resorts luxury hotel chain by the end of December.
Indian Overseas Bank , Central Bank of India and Bank of Maharashtra rose 1-2 percent each after Finance Minister P. Chidambaram identified them as the state-run lenders in more need of public funds.
The government will decide in the next few weeks how much additional capital will be injected into state-run banks, Chidambaram said on Thursday.