The sensitive index (Sensex) of the Bombay Stock Exchange (BSE) -- which opened at 16,855.91 points -- fell sharply in the last 30 minutes of trade to 16,693.06 points (provisional), down 201.19 points or 1.19 percent from its previous close at 16,894.25 points.
At the National Stock Exchange (NSE), the broader 50-share S&P CNX Nifty also lost heavily to shut shop at 4,982.5 points, against the previous close at 5,041.75 points, a loss of 59.25 points or 1.18 percent.
Broader market indices were also hit by the selling spree and ended lower, though not as much as the leading indices.
The BSE midcap index closed 0.67 percent lower, while the BSE small cap index ended 0.47 percent down.
The market was trading almost flat till noon and had in fact even touched the positive territory. But an early afternoon report that the Reserve Bank Governor will meet the Finance Minister in the Capital spooked the market triggering heavy sell-off towards the end of the day.
The market is worried that the RBI may hike rates even before the January policy meet as food inflation which touched 20 per cent earlier this week, has become a hot political issue which even stalled Parliament early this week.
The market leader Reliance Industries led the fall by shedding as much as 2.28 per cent while realty major DLF lost 1.97 per cent and ICICI Bank shed 2.02 per cent.
However, majority marketmen are not much worried as they attribute the fall to year-end selling by FIIs ahead of the Christmas and new year season. Hightech Securities director Sanjeev Bhambri opined that "the market may face more pressure in the short-term but the long-term looks bullish."
Even a higher opening in Europe failed to arrest the fall.
However, SMC Global vice-president Rajesh Jain said the negative sentiment was primarily due to the rising dollar, which hit a three-month high yesterday, massively pulling down the Western markets.
"There is overall pressure in the market as the dollar is rising. There has been some sort of safe-haven buying in the dollar, which shows that foreign investors are taking out money from the emerging markets and putting in the dollar.
"A strong US dollar is affecting all asset classes, including gold and silver, and that is why stock markets worldwide are in a downtrend. But if the US markets fall we will witness a good amount of correction," said SMC's Jain.
Today's fall was across the sectors, with the health care, consumer durables and auto counters being the exception but with overall marginal gains.
While the Sensex heavyweight Reliance Industries led the pack of losers with a 2.28 per cent fall, Tata Motors was the day's biggest gainer with a massive 3.16 per cent rally, following it better than expected global sales last month.
On the heavy fall of the RIL shares, SMC's Jain pointed out that "RIL has been under-performing the market since June. This shows that nobody is actually buying the stock and that is why for every market decline we see the Sensex heavyweight plunging."
The other major losers in the Sensex pack were Sterlite Industries (2.03 per cent), ICICI Bank (2.02 per cent), Bharti Airtel (1.89 per cent), Hind Unilever(1.86 per cent), Hindalco (1.48 per cent), JP Associates (1.41 per cent), Infosys (1.36 per cent), ONGC (1.22 per cent) and RelCom that shed 1.09 per cent.
The auto index was led by the massive rally in the Tata Motors counter which firmed up by 3.16 per cent, while another positive counter, the healthcare- was led by Sun Pharma which rose by 1.12 per cent.
Among the major sectoral indices, the BSE Realty index dropped by 77.88 points or 2.06 per cent, the BSE Oil & Gas index shed 176.06 points or 1.74 per cent, the BSE-FMCG index lost 34.24 points or 1.23 per cent and the BSE Bankex declined by 17.80 points or 1.22 per cent.
However, the BSE Heathcare Index rose by 66.71 points or 1.32 per cent, and the auto index was up 0.27 per cent.
The market breadth was negative as 1,650 ended with losses and 1,180 finished with gains the BSE.
The trading volume improved further to Rs 4,584.57 crore from Rs 4,517.99 crore on Thursday. Havells India was highest traded securities with a turnover of Rs 168.65 crore followed by DLF (Rs 167.59 crore), SBI (Rs 126.42 crore), HDIL (Rs 126.28 cr) and Tata Steel (Rs 121.71 cr).