The BSE Sensex fell 1.4 percent on Monday on broad selling by investors worried about a depreciating rupee, slowing growth and a sluggish policy environment, with a shaky global economic backdrop also dragging.
Energy major Reliance Industries fell as much as 2.2 percent, while lenders, software outsourcers and top mobile operator Bharti Airtel were among the other top losers.
Shares in Bharti dropped as much as 3.4 percent in early trade after the federal police searched its office along with that of Vodafone's Indian unit over the weekend, seeking details on spectrum allocation by the government to operators between 2001 and 2002.
At noon, (0630 GMT), the main 30-share BSE index was trading 1.35 percent lower at 16,149.38 points, with 24 of its components in the red.
The benchmark, which is down more than a fifth this year, is among the world's worst performing stock index. Foreign portfolio investors have bought equities worth $571 million so far this year, sharply lower than $29 billion they invested in 2010.
"A weak rupee is fuelling fears of a large-scale withdrawal from the (equity) market," said Deven Choksey, managing director at brokerage K.R. Choksey.
Indian rupee hit a new 32-month low of 51.7950 to a dollar in early trades as demand from oil refiners weighed. Traders said the Indian central bank had likely sold dollars starting 51.79 rupees to arrest the sharp fall.
"A weak rupee means we will continue to import inflation. This is impacting corporate earnings and weighing on overall sentiment," said D.D. Sharma, senior vice-president at brokerage Anand Rathi.
A near double-digit inflation has forced India's central bank to raise interest rates 13 times since March 2010, slowing down Asia's third-largest economy.
Top lender State Bank of India, HDFC Bank and ICICI Bank were down about 1.8 percent each.
India's software exporters, which derive majority of their revenues from overseas, were down 1.15 percent, on concerns that a lingering euro zone concerns could curtail revenue.
"A weak currency wouldn't help IT exporters beyond a point as they hedge their position," said Ambareesh Baliga, chief operating officer at brokerage Way2Wealth Securities .
Top software services firm TCS fell 1.87 percent, while smaller rival Infosys was down 0.78 percent.
Sluggishness in pushing domestic policy reforms have also hit investor sentiment.
The parliament will convene for its winter session on Tuesday with a long list of pending policy decisions, but analysts do not expect too many policy initiatives.
The 50-share NSE index was down 1.36 percent at 4,838.90 points.
In the broader market, there were two losers for every gainer, on a volume of 164 million shares.
The MSCI's measure of Asian markets other than Japan was down 1.67 percent, while Japan's Nikkei was down 0.32 percent.
STOCKS ON THE MOVE
* Oil marketing companies Indian Oil Corp, Hindustan Petroleum Corp, and Bharat Petroleum Corp were down more than 2 percent on concerns a weakening rupee would increase their cost of crude import.
* Kingfisher Airlines rose as much as 7.9 percent on a newspaper report citing an official familiar with the development that the government had asked state-run Life Insurance Corp to buy stake in the debt-hobbled airline.
TOP THREE BY VOLUME
* Suzlon Energy on 15.5 million shares
* Shree Renuka Sugars on 11.1 million shares
* Pipavav Defence and Offshore Eng on 10.8 million shares