The 30-share BSE Index dropped 296.42 points to 9,110.05, its lowest close since Dec. 5. It briefly pared losses to 0.8 per cent after industrial output unexpectedly rose in November, but then fell 4.1 per cent before pulling back.

Ved Prakash Chaturvedi, managing director at Tata Mutual Fund, said the market was reacting to negative news in India and globally.

"Funds, both domestic and foreign, are not buying and that is a cause for concern. People are also scared that corporate earnings may not be as good as previous quarters or maybe worse," he said.

Mid-sized software services firm Megasoft Ltd fell to an all-time low of 13.80 rupees after the World Bank said it had barred the firm for four years in December 2007 for participating in a joint venture with bank staff while conducting business with the bank. The stock closed down 0.6 per cent at 15.75 rupees.

"People are apprehensive there might be more such disclosures and there are wild rumours doing the rounds," said Gaurang Shah, chief manager at Geojit Financial Services.

Twenty-eight of the BSE index components fell, while in the broader market losers overwhelmed gainers in the ratio of 1.96:1 on above average volume of 283.7 million shares.

No. 2 outsourcer Infosys Technologies, which announces quarterly results and gives its outlook on Tuesday, closed down 3.2 per cent at 1,156.60 rupees.