MUMBAI (Reuters) - The BSE Sensex fell 0.5 percent on Wednesday, led by banks and retailers, as investors saw a poor election result for the country's ruling Congress party pouring cold water on an already-struggling economic reform agenda.
The Congress flop in India's most politically vital state of Uttar Pradesh on Tuesday is seen hampering efforts to re-launch reforms and reverse a slowdown in growth, as investors await the annual budget this month.
"The markets may test 17,000 on Uttar Pradesh results and concerns over reforms," said Nitin Khandkar, founder of Nitin Khandkar Institutional Research. "Oil prices continue to weigh."
India is set to unveil the annual budget on March 16, and investors are hoping for news on a string of key economic reforms from a government that has been hamstrung by corruption scandals and coalition dissent over the past year.
At 10 a.m. (0430 GMT), the benchmark 30-share BSE index was down 0.39 percent at 17,106.52, with all but 11 of its components in the negative territory.
The index fell a combined 2.63 percent on Monday and Tuesday to hit its lowest close in more than five weeks.
Top lender State Bank of India weighed heavily on the index, slipping 1.3 percent, with rivals ICICI Bank down 0.6 percent and HDFC Bank trading 1.7 percent lower.
Retailers extended falls for a second day after the state election results were seen further scuppering plans to open up the country's retail sector to foreign supermarkets.
Pantaloon Retail dropped 4.3 percent, Shopper's Stop shed 4.2 percent and the Tata Group's Trent unit was down 1.6 percent.
Investor sentiment was also muted by negative headwinds overseas, as global markets fell on renewed uncertainty over Greece's bailout and mounting worries about slowing global economies.
"The Indian market is likely to extend yesterday's losses... on the back of negative global cues and remain volatile in a range with negative bias throughout the session," HDFC Securities wrote in a note on Wednesday.
Top carmaker Maruti Suzuki was down 0.9 percent, with peers Tata Motors and Mahindra & Mahindra also losing ground as investors fretted over a resurgence in India's economic growth.
The broader 50-share NSE index was down 0.41 percent at 5,200.15.
The MSCI's broadest index of Asia Pacific shares outside Japan was down 0.74 percent, while the benchmark indexes in Japan and South Korea were both down 0.8 percent.
STOCKS ON THE MOVE
* Era Infra Engineering rose 1.8 percent after the company said late on Tuesday that it won a contract worth 5.6 billion rupees from Delhi Metro Rail Corporation.
* Zuari Industries fell as much as 2.0 percent after Indian fertiliser companies said on Tuesday that they had deferred imports of over 2 million tonnes of potash on low demand.
* Hero MotoCorp rose as much as 1.3 percent after the Hindu Business Line newspaper reported on Wednesday that India's top motorcycle maker would spend 12 billion rupees on a new factory.
TOP 3 BY VOLUME
* Lanco Infra on 18 million shares
* Jaiprakash Associates on 15 million shares
* Reliance Power on 11 million shares
(Reporting by Henry Foy; Editing by Ranjit Gangadharan)