The benchmark BSE Sensex fell over 350 points in early trade on Tuesday amid rising tension between India and Pakistan but recovered 110 points at 35,974. The Sensex ended 239.67 points, or 0.66 per cent, lower at 35,973.71 after touching a low of 35,842.58. The gauge rallied 342 points in Monday's trade. The 50-share Nifty also fell by 44.80 points, or 0.41 per cent, to 10,835.30 .
According to brokers, domestic investor sentiment took a beating after the Pakistan Army on Tuesday alleged that the Indian Air Force violated the Line of Control (LoC) in Muzafarabad sector.
The allegation came amid heightened tension between India and Pakistan after the February 14 suicide attack by Pakistan-based Jaish-e-Mohammad terror group that killed 40 CRPF soldiers in Jammu and Kashmir's Pulwama district.
"Indian indices traded lower mainly due to two factors ? first, the indications of weakness from all major Asian markets since their opening; and second, the strike carried out by the Indian Air Force against terrorist camps located inside Pakistan," said Joseph Thomas, Head Research, Emkay Wealth Management.
The laggards that dragged the key indices include Yes Bank, Hero MotoCorp, Tata Steel, Vedanta, Sun Pharma, ICICI Bank, SBI, RIL, M&M, Kotak Bank, Bajaj Finance, Infosys, NTPC, HDFC, Maruti Suzuki, Bajaj Auto, IndusInd Bank, L&T, PowerGrid, Axis Bank, HDFC Bank, Asian Paint, ITC and ONGC, falling by up to 2.38 per cent.
The Indian Air Force struck Jaish-e-Mohammed's (JeM) biggest camp in Pakistan early Tuesday in a major "preemptive" action, killing a large number of terrorists and trainers of the Pak-based terror group preparing to carry out suicide attacks in India.
On the other hand, TCS, HUL and Tata Motors rose up to 0.93 per cent. Most of the BSE sectoral indices were trading in the red, led by banking, power, PSU, realty and IT stocks with losses up to 0.90 per cent.
Meanwhile, the rupee which depreciated 38 paise to 71.35 against the US dollar in early trade, recovered partially to quote at 71.06 in late afternoon trade at the forex market, and was still trading 9 paise lower over its previous close of 70.97.
Fresh round of selling by domestic institutional investors (DIIs) also dampened market sentiment here, brokers said.
Meanwhile, DIIs sold shares worth Rs 1,764.4 crore, while foreign portfolio investors (FPIs) bought shares worth a net of Rs 2,134.35 crore on Monday, provisional data showed.
In the Asian region, Hong Kong's Hang Seng was down 0.49 per cent, Japan's Nikkei fell 0.20 per cent, Taiwan shed 0.14 per cent, Korea's Kospi shed 0.19 per cent and Singapore Straits Times was down 0.27 per cent in late morning trade Tuesday.
The US Dow Jones Industrial Average, however, ended 0.23 per cent higher on Monday.
(With inputs from PTI)