The BSE Sensex posted its first weekly fall in 2012 on Friday, sliding 2 percent over five sessions, as investors booked profits on renewed worries about rising global oil prices and the country's widening fiscal deficit.
Lenders such as State Bank of India, ICICI Bank and HDFC Bank were the big losers, as expectations for a rate cut in March were tempered by the rally in global oil prices, which could make it difficult for the RBI to ease policy.
Leading mortgage lender Housing Development Finance Corp fell as much as 6.2 percent after Citigroup Inc sold its entire stake in the company for about $1.9 billion.
"There is a lot of profit booking, as people look to take their money off the table with a lot of uncertainty ahead with events like the budget coming up," said Hitash Dang, vice president at Jaypee Capital.
The main 30-share benchmark index fell 0.86 percent, or 154.93 points, to close at 17,923.57, with 16 of its components losing value.
The benchmark has gained over 16 percent since the end of December.
Foreign funds have helped drive the rally, investing more than $5 billion so far this year, data from the Securities and Exchange Board of India showed. This is in stark contrast to 2011, when they were net sellers of about $500 million.
"(The) market turned bearish as investors booked profits from recent rallies as concerns mounted over the state of the global economy, including rising oil prices," HDFC Securities wrote in a note on Friday.
India's fiscal gap for the current financial year is widely expected to be 5.5 percent of GDP, wider than 4.6 percent projected by the government in February last year.
India imports about 80 percent of the oil it consumes and the rise in prices could worsen a widening trade deficit.
Brent crude climbed above $124, on track for a fifth straight weekly gain, as worries over Iranian supply and upbeat U.S. economic data offset concerns that high oil prices could snuff out demand.
Investors are also watching the elections underway in Uttar Pradesh, India's largest state, which may have an impact on the stability of the central government. Counting of votes is expected to begin in early March.
"If the outcome of the election were to add uncertainty for the government, it will be seen as negative by the market," said Arun Kejriwal, a strategist at Indian research firm KRIS.
SBI, the country's biggest lender, ended the session down 2.4 percent at 2,205.60 rupees on Friday. The state-run bank's planned share sale to the government was priced at a discount to Thursday's close price.
Rivals ICICI Bank ended down 1.3 percent at 931.65 rupees and HDFC Bank shed 1.6 percent to close at 524.65 rupees. The sector index fell 2.0 percent.
HDFC ended the day down 3.6 percent at 676.40 rupees.
Shares in Mangalore Chemicals jumped as much as 16 percent after newspaper reports said UB Group Chairman Vijay Mallya had been approached by potential buyers of UB's 30.4 percent stake in the company.
The stock ended 10.2 percent higher at 44.35 rupees.
The broader 50-share NSE index closed 0.98 percent lower at 5,429.30. In the broader market, just over twice as many stocks lost value as those that gained, with a more-than-average 1.03 billion shares changing hands.
European shares rose on Friday as investors focused on bright spots in the global growth outlook, but unease about soaring oil prices and implementation of Greece's rescue deal tempered risk appetite.
At 1010 GMT, global stocks as measured by MSCI were up 0.4 percent thanks in part to a positive session in Asia.
STOCKS ON THE MOVE
Shasun Pharmaceuticals shares rose 8.5 percent after the company said its board would meet on February 27 to consider a preferential allotment of shares to private-equity investors. DB Realty, part of India's DB Group, closed 7.1 percent lower, extending losses to a third day. Abu Dhabi-based Etisalat said this week it is shutting down its Indian mobile joint venture with DB Group and has launched legal proceedings against its Indian partners.
DB Realty has said the shutdown of the mobile venture would have no bearing on its financials because this was an investment by its founders in their individual capacity.
Shares in ABB Ltd , unit of Swiss engineering group ABB, fell as much as 6.4 percent before closing down 5.4 percent after the company posted lower-than-estimated sales and margin growth.
MAIN TOP THREE BY VOLUME
HDFC on 158 million shares
Lanco Infratech on 96.4 million shares
Sterlite Industries on 34.8 million shares