Opening firm, the Bombay Stock Exchange bellwether Sensex failed to maintain the momentum and closed lower by 116.36 points or 0.57 per cent at 20,184.74 -- the level last seen on December 29, 2010.
The key index has plummeted by 376.35 points or 1.83 per cent in the last three trading sessions.On similar lines, the National Stock Exchange's wide based Nifty also lost ground after a firm opening, and finished at 6,048.25, down 31.55 points or 0.52 per cent from previous close.
Marketmen said a sharp rise in food inflation to 18.32 per cent for the week ended December 25, 2010, coupled with FII tepid inflows, added to the market woes.
A report by a brokerage firm India Infoline cautioned that 2011 is likely to be a year of negative returns for Indian equities.
"Growth in capital formation is faltering, the current account deficit is widening partly due to rising energy-import dependence, inflationary pressures are building up all over again, and policy rates are set to further harden," IIFL Economist Ashutosh Datar and Head-Institutional Equities Nemkumar said in a report.
Profit-booking in the infrastructure giant Larsen & Toubro, which plunged by 2.74 per cent, was the biggest contributor to the overall fall.
The realty sector index suffered the most by losing 2.41 per cent to 2,713.74 on fears the RBI rate hike in interest rate would directly impact on the sale of homes.The capital goods sector was down by 1.88 per cent to 14,912.81, followed by the auto sector index which fell 1.59 per cent to 9,806.13. Consumer durable index lost 1.41 per cent to 6,312.31.
Besides, banking shares including SBI and ICICI Bank continued to remain under pressure, with the former declining by 2.67 per cent and the latter shedding 1.59 per cent.
However, another top private lender HDFC Bank saw some value buying after the recent fall, as the stock rebounded by 0.50 per cent.Copper producer Sterlite Industries emerged as the biggest laggard with the investors locking-in gains.
The scrip slumped by 3.8 per cent, while, in a sharp contrast the aluminium manufacturer Hindalco was the best performer among the 30-Sensex stocks with a gain of 1.7 per cent.Barring IT and Technology sector, all the other 11 indices ended the day on a weak note. IT stocks, including TCS and Infosys, rallied 1.39 per cent and 0.24 per cent respectively.
"IT stocks are gaining momentum on the weakness in the rupee as the overseas investors are buying dollars," said an expert.
Of the 30-Sensex components, 19 ended the day on a subdued note. Two-wheeler giant Bajaj Auto continued to bear the brunt of disappointing December sales numbers with a fall of 3.6 per cent, as the scrip slipped for the fourth straight day.
Also, fertiliser shares slumped on the deferment of the EGoM decision on deregulating urea prices, while cement shares dropped after Fitch downgraded outlook for cement companies.
Marketmen said that the short-term direction will hinge on global cues, quarterly earnings and the outcome of RBI’s policy meeting later this month.Globally, China's Shanghai also fell by 0.51 per cent on fears of another interest rate hike in the short term, while Japan's Nikkei ended with a gain of 1.44 per cent.
European markets were also trading firm in the afternoon session.