The BSE Sensex fell 0.85 percent, marking its fifth consecutive day of decline, while the Nifty fell 1 percent on Monday to its lowest close in nearly a month after better-than-expected U.S. jobs data revived concerns the Federal Reserve would start tapering its monetary stimulus as early as next month.
A surprise surge in U.S. jobs growth heightened worries boosting the dollar against the euro, yen and the rupee while Asia shares fell to their four-week lows.
Selling worth of over 10 billion rupees of index futures by foreign funds on Friday also weighed on the sentiment, raising worries about a potential slowdown in their buying volume ahead of key macroeconomic data later this week.
"Fed tapering is aiding the concerns of heavy redemption in the local market. Inflation would, however, be supportive," said Vivek Mahajan, head of research at Aditya Birla Money.
India will report consumer price inflation and industrial output data on Tuesday, and wholesale price inflation on Friday.
Overseas funds have been buyers of Indian equities for the last 25 consecutive sessions with total inflows so far in 2013 now at almost $16.7 billion, which helped the benchmark BSE index hit a life high earlier this month.
"There is some caution ahead of state elections but Fed tapering concerns are overdone. I expect the inflation data to support the markets later in the week," said Deven Choksey, managing director at K R Choksey Securities.
The broader Nifty fell 1.01 percent, or 61.95 points, to 6,078.80, marking its lowest close since October 17.
The Sensex fell 0.85 percent, or 175.19 points, to 20,490.96, marking its fifth consecutive day of decline.
Blue chips were among the worst hit, with Larsen and Toubro Ltd falling 3.2 percent and Reliance Industries Ltd losing 1.4 percent.
Tata Motors Ltd fell 1.8 percent after operating profit margins at key unit Jaguar Land Rover Ltd (JLR) for the July-September quarter missed estimates when adjusted for one-time tax incentives.
India's Tata Chemicals Ltd ell 1.5 percent after its September-quarter consolidated net profit nearly halved to 1.
Central Bank of India Ltd shares fell 4.2 percent after posting a net loss of 15.09 billion rupees for the September quarter.
Reliance Infrastructure Ltd fell 2.2 percent ahead of its July-September results later in the day while Reliance Communications Ltd fell 2.6 percent a day ahead of its quarterly results.
Indian Oil Corp Ltd slumped 4.8 percent while Coal India Ltd ended 0.7 percent lower after the government revived plans to sell stakes in the state-owned companies.
Shares of Apollo Tyres rose 4.1 percent on a favourable U.S. court ruling.