Belying a start that showed promise, the benchmark BSE Sensex soon ran out of steam as it crashed over 541 points to settle below the 26,000-mark on heavy sell-off after ADB lowered India's growth forecast amid steep losses in Europe and lingering growth concerns.
The broader NSE Nifty too sank below the 7,900-mark.
Cautious investors offloaded bets ahead of the September derivatives expiry on Thursday, which weighed.
The US futures market showed a weak trend as well.
After starting on a firm note, the 30-share index cracked under all-round selling and ended the day at 25,651.84, down 541.14 points, or 2.07 per cent.
This is the index's lowest closing since September 10.
The NSE Nifty hit a low of 7,787.75 before settling lower by 165.10 points, or 2.07 per cent, at 7,812.
Brokers said sentiment took a turn for the worse after the Asian Development Bank (ADB) lowered its growth projections for India for 2015-16 to 7.4 per cent, from the 7.8 per cent earlier, citing weak monsoon, poor external demand and inability of the government to push reforms.
Fresh weakness in the rupee, which fell to Rs 66 against the dollar in the intra-session, too took its toll.
Stocks in the metal space suffered the most after the entire base metal pack retreated at the London Metal Exchange (LME) on mounting global stock amid renewed concerns over slowing growth in China, the biggest consumer of metals.
The big losers in the metal segment included Vedanta, Hindalco and Tata Steel.
Coal India, Tata Motors, NTPC, L&T and Axis Bank lost big time too.
Of the 30-share Sensex pack, 26 ended in the red.
Sectorwise, BSE metal index suffered the most, down 4.24 per cent, followed by capital goods, power, banking and realty.
In broader markets, the mid-cap index plunged 1.57 per cent while small-cap ended 1.21 per cent lower.
Shares of Amtek Auto plunged 11.46 per cent amid reports that the company has missed payments on maturity of bonds.
Meanwhile, foreign portfolio investors (FPIs) bought shares worth a net Rs 154.87 crore yesterday, data showed.
Shanghai ended 0.92 per cent higher while Hong Kong's Hang Seng gained 0.18 per cent.
Financial markets in Japan remained shut today for a public holiday and will reopen on Thursday.
European shares were under pressure and traded sharply lower in their early trade.