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Sensex and Nifty fell for a fifth consecutive session on Thursday to two-week lows as concerns about protracted negotiations to avoid a U.S. "fiscal cliff" hit software services exporters such as Tata Consultancy Services and Infosys.
Investors also booked profits in recent out-performers such as Tata Motors
Worries at home are also expected to prevail despite data on Wednesday showing the wholesale price index eased, as headline inflation is still high enough to be a headache for policymakers struggling to balance the need for growth with taming prices.
Analysts said markets may remain vulnerable unless the government announces additional economic and fiscal reforms, given the central bank has indicated it won't cut interest rates until the January-March quarter of 2013.
"Fiscal cliff is more of fancy words but implementation of reforms by the government would be the next big trigger," said Vijay Kedia, a director at Kedia Securities.
The Sensex fell 0.79 percent, or 147.50 points, to end at 18,471.37 points, marking its lowest close since October 30.
The Nifty fell 0.63 percent, 35.95 points, to 5,631.00 points, marking its lowest close since October 31.
Both indexes have fallen for five consecutive sessions including shortened Diwali trading hours on Tuesday. Markets were closed on Wednesday for a public holiday.
Software services exporters, which derive more that half of their revenues from the United States, were among the leading decliners.
Tata Consultancy Services
Metal stocks also fell tracking weaker prices of the commodity at the London Metal Exchange. Hindalco Industries
Investors also booked profits in recent out-performers. Tata Motors
Tata shares fell even after the auto maker said global sales rose 6 percent in October, including a 7 percent rise at key unit Jaguar Land Rover.
However, among gainers, wireless services providers gained after an auction of 2G airwaves attracted less demand than targeted by the government, leading to lower prices that are giving a respite to the debt-ridden industry.
The property developer said later in the day it would aim to sell its Aman Resorts luxury hotel chain by the end of December.
The government will decide in the next few weeks how much additional capital will be injected into state-run banks, Chidambaram said on Thursday.