Post-poll uncertainty in Karnataka and flaring up of tensions on the Korean peninsula affected investor optimism on Wednesday.
Banking stocks were battered after Punjab National Bank (PNB) posted a record loss for the March quarter amid the government tightening the screws on some public sector bankers.
The Sensex fell 156.06 points, or 0.44 per cent, to end at 35,387.88, while the NSE Nifty lost 60.75 points, or 0.56%, to 10,741.10.
Globally, most Asian markets fell after North Korea unexpectedly cancelled high-level talks with Seoul and threatened to call off the much anticipated summit with the US, reigniting tensions on the peninsula.
On the macro front, trade deficit widened to $13.7 billion in April, which further hit sentiment, brokers said.
Foreign portfolio investors (FPIs), who have been net sellers in the last few sessions, sold shares worth Rs 5.18 billion, while domestic institutional investors (DIIs) bought shares worth Rs 5.31 billion on Tuesday, according to provisional data.
"Uncertainty over the formation of the government in Karnataka and lower-than-expected quarter earnings have created concern about the market direction. Fall in oil prices and appreciation in the rupee helped to trim the day's losses. Consumption oriented companies are performing well on account of increased spending in the rural market," said Vinod Nair, research head, Geojit Financial Services.
Among Sensex stocks, ICICI Bank fell 3.28 per cent, followed by RIL (down 2.34 per cent), SBI (down 2.19 per cent) and Hero MotoCorp (down 2.10 per cent). PNB shares plunged 12.15 per cent after the company on Tuesday posted a loss of Rs 134.16 billion during the January-March period, the biggest ever by any domestic lender.