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Global cues such as increased chances of a US rate hike, disappointing China trade data and renewed fears of an early exit of Britain from the European Union (Brexit), too, dragged the key indices to end lower by more than 1.50 per cent each.
The wider 51-scrip Nifty of the National Stock Exchange (NSE) plunged by 135.45 points or 1.56 per cent to 8,573.35 points.
The barometer 30-scrip sensitive index (Sensex) of the BSE, which opened at 28,042.62 points, closed at 27,643.11 points -- a tumble down of 439.23 points or 1.56 per cent from the previous close at 28,082.34 points.
The Sensex touched a high of 28,042.62 points and a low of 27,563.84 points during the intra-day trade.
The BSE market breadth was in favour of the bears -- with 1,931 declines and 933 advances.
On Monday, the last trading day, both the key Indian indices had made marginal gains on the back of positive global cues.
The barometer index had closed higher by a mere 21.20 points or 0.08 per cent to 28,082.34 points, while the NSE Nifty inched-up by 11.20 points or 0.13 per cent to 8,708.80 points.
Initially on Thursday, the benchmark indices opened on a negative note in sync with their Asian peers.
The Asian, domestic and European markets plunged due to increased chances of US Federal Reserve (US Fed) going in for a rate hike in December.
The September meeting minutes of the Federal Open Market Committee (FOMC) revealed that most members were in favour of a rate hike in the later part of the calendar year.
A rate hike can potentially lead FPIs (Foreign Portfolio Investors) away from emerging markets such as India, and is also expected to dent business margins as access to capital from the US will become expensive.
In addition, sentiments were dampened by disappointing factory output data released on Monday and anxiety over the upcoming release of key quarterly results.
India's factory output remained subdued for the second consecutive month -- decelerating by (-)0.7 per cent in August from a decline of (-)2.49 per cent in July and a 6.3 per cent rise in the corresponding month of last year.
The second quarter results season started on October 7. TCS (Tata Consultancy Services) is expected to be the first blue chip firm to come out with its results on October 13, followed a day later by Infosys.
The Indian rupee weakened by 41 paise to 66.93-94 against a US dollar from its previous close of 66.53 to a greenback.
"Heightened chances of a US rate hike and caution ahead of key inflation data led the steep down fall," Anand James, Chief Market Strategist, Geojit BNP Paribas Financial Services, told IANS.
"Investors were spooked ahead of the release of key quarterly results."
According to Dhruv Desai, Director and Chief Operating Officer of Tradebulls, CNX Nifty traded with bearish sentiments tracking global cues and firm USD/INR futures prices.
"Banking, pharma and auto stocks traded down on selling pressure," Desai said.
"However, IT and oil-gas stocks witnessed recovery from lower levels in second half of the session."
In terms of investments, provisional data with exchanges showed that the foreign institutional investors (FIIs) sold stocks worth Rs 911.53 crore, whereas the DIIs bought scrip worth Rs 679.49 crore.
Sector-wise, only the S&P BSE IT index remained afloat. It inched up by 18.30 points.
In contrast, the S&P BSE bank index plunged by 484.32 points, followed by the automobile index, which receded by 300.20 points, and the consumer durables index declined by 243.91 points.
Major Sensex gainers during Thursday's trade were: Infosys, up 2.19 per cent at Rs 1,052.05; ONGC, up 1.70 per cent at Rs 272.05; Cipla, up 0.22 per cent at Rs 581.85; Maruti Suzuki, up 0.21 per cent at Rs 5,724.20; and Hero MotoCorp, up 0.11 per cent at Rs 3,493.50.
Major Sensex losers were: Adani Ports, down 4.68 per cent at Rs 251.65; HDFC, down 3.83 per cent at Rs 1,338.45; ICICI Bank, down 3.56 per cent at Rs 241.20; Reliance Industries, down 3.49 per cent at Rs 1,057.70; and Tata Motors, down 3.17 per cent at Rs 544.30.