Sensex heads for five-month closing low; FIIs continue to sell

MUMBAI (Reuters) - The BSE Sensex and Nifty fell for a third straight session on Thursday, heading towards their lowest close in nearly five months on continued selling by foreign investors on worries over retrospective tax, while weak Asian markets also weighed.

Foreign institutional investors sold shares worth a net 16.99 billion rupees ($265.80 million) on Wednesday, adding to their $360.88 million selloff in the previous session, exchange and regulatory data showed. Overseas investors have been net sellers this month with a net outflow of $693.8 million, the data showed.

Falls also tracked Asian stocks, led by losses on Wall Street, while a rise in euro zone debt yields amid a global bond rout kept the euro near a two-month peak versus the dollar.

The rupee fell to its lowest in 20 months, weighed down by concerns over the government's taxation policies that threaten to reduce the allure of local assets for foreign institutions.

"There is clarity on tax-related issues. Direction is missing in the government's policy decisions. We expect weakness to persist in the near-term," said Suresh Parmar, head, institutional equities at KJMC Capital Markets.

The benchmark BSE index <.BSESN> was down 0.33 percent at 26,628.66, while the broader NSE index <.NSEI> fell 0.24 percent to 8,077.45.

Both indexes were headed towards their lowest closing level since Dec. 17, 2014.

Blue chips heavily owned by overseas investors fell the most. ICICI Bank was down 2.5 percent, while Reliance Industries was lower 1.5 percent.

Oil and Natural Gas Corp fell 2.9 percent and Dr Reddy's Laboratories dropped 2.7 percent.

Bharat Forge fell 5.1 percent on concerns about the company's sales in North America.

SKS Microfinance was trading 2.2 percent lower after Morgan Stanley sold shares in the company through a block deal.

($1 = 63.9200 rupees)

(Reporting by Indulal PM; Editing by Subhranshu Sahu)