The Sensex, which has gained 1,016 points over the past four trading sessions, fell by 99.79 points to 17,705.01 after touching an intra-day high of 17,813.11.
The Sensex had rallied by 6.1 per cent last week as European leaders agreed to expand a bailout fund to stem the region's debt crisis and the Reserve Bank of India signalled the halt of a record cycle of interest rate hikes.
In a similar fashion, the broad-based National Stock Exchange index Nifty lost 34.10 points today, closing at 5,326.60 after moving in a narrow range between 5,314.60 and 5,360.25.
In the 30-share Sensex pack, 22 counters closed with losses, while the remaining registered gains, with the exception of Larsen and Toubro, which remained unchanged in limited deals.
The oil and gas sector index suffered the most, losing 2.09 per cent to 8,987.52 as the most-weighted firm in the 30-share Sensex pack, Reliance Industries, fell by 2.26 per cent to Rs 877.75 and ONGC by 1.97 per cent to Rs 279.
The metal sector index was the second-worst performer, losing 1.97 per cent to 11,904.10. Hindalco Industries was the biggest loser among the 30 Sensex companies, losing 4.11 per cent, while Sterlite Industries was a close second, plummeting by 4.10 per cent. Jindal Steel closed 2.87 per cent lower.
The auto index was dragged down by 0.98 per cent to 9,477.19 over fears that a steep rise in interest rates will hamper sales. In addition, the poor second quarter results of leading car-maker Maruti Suzuki India dampened the sentiment.
Maruti Suzuki had posted a 59 per cent decline in net profit for the second quarter after production was hit by labour unrest.
In the auto segment, Tata Motors lost 3.76 per cent to Rs 198.45, while Bajaj Auto fell by 1.21 per cent to Rs 1,733.15. After plummeting by 6 per cent in early trade, shares of Maruti Suzuki recovered to close 0.21 per cent lower at Rs 1,125.65.
Meanwhile, Asian stocks declined, with the MSCI Asia Pacific Index posting its biggest drop in a month as China vowed to maintain property lending curbs.
European stocks opened lower as investors remained reluctant to buy equities before the euro zone leaders explain how they will fund their expanded bailout facility.