The Bombay Stock Exchange benchmark Sensex, which lost 375 points in last three sessions, plunged by another 492.93 points to 19,691.81, the lowest since December 15.
Intra-day, it had dipped to a low of 19,629.22 triggered by a steep fall in stocks of metal, auto and IT sectors.
Similarly, the broad-based National Stock Exchange index Nifty fell below 6,000 points level, losing 143.65 points, to 5,904.60. It touched an intra-day low of 5,883.60.
Selling pressure gathered momentum on fears of hike in interest rates to curb surging food inflation.
RBI deputy governor said food inflation is "worryingly high", even as the finance minister asked states to improve supplies to help slow price increases.
These comments came on the heals of the International Monetary Fund saying the RBI may have to keep raising interest rates to curb the pace of price increases.
Marketmen said investors were worried that the hike in interest rates will have a negative impact on industry and might slowing down economic growth.
A weak trend in the Asian region and lower opening in Europe further influenced the market sentiment.
The metal sector index suffered the most by losing 4.03 per cent to 16,943.54, following a steep fall in Tata Steel, Sterlite Industries, Hindalco, Sesa Goa and JSW Steel. Hindalco Industries, an aluminium producer recorded its steepest drop since November 2009.
The interest senstive index of auto segment dropped by 3.26 per cent to 9,486.47 as Tata Motors, the leading truckmaker sank the most in more than seven months.
The banking index fell by 1.38 per cent to 12,512.18 as State Bank of India, the biggest state-run lender dropped 0.97 per cent, taking its weekly slide to 8.3 per cent. The stocks of HDFC Bank, ICICI Bank and Axis Bank also recorded fresh losses.
As the selling spread over a broad-front, smallcap sector index lost 2.86 per cent to 9,363.19 and midcap index by 2.49 per cent to 7,470.70.