The benchmark indices plunged up to 1.72 per cent in late morning trade after Fitch Ratings said weak public finances constrain Indias sovereign ratings.
The Sensex tumbled by 591.69 points or 1.64 per cent to quote at 35,314.97 as banking, financials capital goods and auto stocks nosedived.
Also, the NSE Nifty dipped below the 10,900-mark to trade at 10,826.50, down by 190.40 points, or 1.72 per cent.
Widespread selling dragged all the sectoral indices led by realty, consumer durables, power, capital goods and banking sectors, falling up to 5.17 per cent.
Stocks had opened down as the government's proposal to impose a 10 per cent long term capital gains tax on equity gains of over Rs 1 lakh hit triggered profit booking in frontline stocks.
Finance Minister Arun Jaitley projected a fiscal deficit of 3.5 per cent of GDP for current fiscal against the earlier target of 3.2 per cent which also dampened the market sentiment.
The sentiment took another jolt after Fitch Ratings today said high debt burden of the government constrains Indias rating upgrade.
Banking stocks led by Yes Bank, SBI, ICICI Bank, Kotak Bank, HDFC LTD and IndusInd Bank suffered losses up to 3.80 per cent. Other losers that pulled down the key indices from their crucial levels were ONGC, Tata Steel, Maruti Suzuki, M&M, Hero Motocop, Power Grid, Coal India, Asian Paints, Reliance Ind, Coal India.
In the broader market, the BSE Midcap index fell by
2.79 per cent while the Small index took a bigger hit of 3.67 per cent on heavy losses in PC Jewellers.
PC Jewellers tanked 50 per cent in early trade before trading at Rs 397.10, down by 17 per cent at 1135hrs.
Global markets were also trading in the negative after most of the US stock indices fell due to political crisis and growth concerns.