Markets extended losses in late morning trades after a private survey showed that India's December Nikkei Manufacturing PMI stood at 49.1 vs 50.3 in November, lowest since August 2013. A reading below 50.0 indicates contraction.
Further, suspension of stock trading in China also dampened sentiment. Reports suggest that trading on the Shanghai Stock Exchange was suspended for the day after the benchmark Shanghai Composite slumped 7%.
At 11:45am, the S&P BSE Sensex was down 418 points at 25,743 and the 50-share Nifty50 was down 131 points at 7,832.
In the broader markets, BSE Mid-cap index was down 0.4% and the Small-cap index was down 0.1%. Market breadth continued to remain weak with 1,315 gainers and 1088 losers on the BSE.
Meanwhile, India's volatility index, India VIX surged 17% at 16.6875.
"China's PMI continues to underline its downward growth trajectory with equity markets reflecting a sub-7% GDP figure for calendar 2016 and beyond. India's manufacturing PMI has hitherto stayed reasonably resilient despite weak aggregate demand. However,a sub-50 print at the beginning of the year marks extended expectations on a recovery. One would hope that prudent fiscal expansion and select sector-wise recovery would bring back the PMI to expansion phase," said Tirthankar Patnaik, Chief Strategist at Mizuho Bank.
The Indian rupee fell further against the US dollar and was trading 31 paise lower at 66.45 compared to the previous close.
Asian markets fell further after trading on the Shanghai Stock Exchange was suspended for the day following a sharp fall of 7.4% in the benchmark Shanghai Composite after its PMI slipped to to 48.2 in December, from 48.6 in November, shrinking for the tenth straight month.Japan's Nikkei was down 3.2%. Among others, Straits Times eased 1.6% while Hang Seng was down 2.9%.
All sectoral indicex on the BSE were trading lower with BSE Bankex emerging as the top loser down over 2% followed by Healthcare, Capital Goods among others.
Banks which are a proxy to the economy were the top losers amid weak December manufacturing PMI. ICICI Bank, HDFC Bank, Axis Bank and SBI were down 1.5%-2.6% each.
Among the index heavyweights, HDFC, Reliance Industries, Infosys and ITC were down 1.2%-2.4% each.
Tata Motors was down nearly 4% after the company posted a 4% decline in sales at 39,973 units for December as against 41,734 vehicles in December 2014.
The Telecom Regulatory Authority of India (Trai) has written to operators to ensure compliance with call drop regulations, effective January 1, even as service providers remain defiant and say compensation to subscribers will be paid only after court orders them to do so. Bharti Airtel was down 3.6% while Idea Cellular eased 4.6%.
Hero MotoCorp dipped 1.4% after the total two-wheeler sales of the company declined 5.13% to 4.99 lakh units in December 2015 over December 2014.
Coal India was down nearly 1% as offtake for December 2015 was lower at 48.16 mt against a target of 49.46 mt.
Among others, Royal Orchid Hotels has rallied 11% to Rs 84.35, extending its 20% surge in past two trading sessions on the National Stock Exchange (NSE), after SBI Mutual Fund has sold its entire 8.44% stake in the company through open market.
Punj Lloyd has moved higher by 9% to Rs 31.35 on the BSE after the company announced that it has received four highway EPC projects worth Rs 1,555 crore in the states of Bihar, Chhattisgarh, Odisha and Punjab.