Finance Minister Pranab Mukherjee in a mid-year analysis Friday said the economy would grow only by 7.5 percent (plus or minus 0.25 percent) and warned that the fiscal deficit target of 4.6 percent may not be achieved in the current financial year.
The 30-scrip sensitive index (Sensex) of the Bombay Stock Exchange (BSE), shed 3.76 percent or 633.37 points to close the week at 16,213.46 points.
The 50-scrip S&P CNX Nifty of the National Stock Exchange too followed suit and fell 3.63 percent or 183.45 points and closed Friday at 4,866.70 points.
Broader markets also saw profit booking with the BSE 500 index registering a weekly loss of 3.23 percent. The BSE midcap index slipped 2.47 percent while the BSE smallcap index fell 2.41 percent, compared to last week.
Foreign institutional investors (FIIs) were net buyers, pumping in $233.08 million during the week, according to data available with the Securities and Exchange Board of India (SEBI). December has seen FIIs buy in over $435 million.
"The sell-off in equities was mainly due to issues on the domestic and economic front. Developments on the political front related to the 2G fiasco exacerbated the selling pressure. Concerns on the fiscal health of the country may have also weighed on the market," said Sanjeev Zarbade, vice president with Kotak Securities.
Globally, all eyes were on the European summit meeting. Investors started getting spooked in the absence of any meaningful steps being announced by leaders.
EU leaders agreed to stricter budget rules for the eurozone, a move which is seen crucial in securing a viable future for the zone's single currency, but failed to secure changes to the EU Treaty among all 27 member states.
Among global markets, Asia edged lower. On a weekly basis, the Japanese Nikkei closed 1.24 percent down at 8,536.46 points, while Hong Kong's Hang Seng ended 2.39 percent lower at 18,586.23 points.
The Chinese Shanghai composite index shed 1.92 percent and closed the week at 2,315.27 points.
European markets closed on a mixed note.
Britain's FTSE 100 fell 0.42 percent down at 5,529.21 points, while the German DAX closed 1.55 percent lower at 5,986.71 points during the week.
The French CAC 40 closed 0.23 percent up at 3,172.35 points.
Wall Street, however, managed some gains. The S&P rose 0.88 percent and closed the week at 1,255.19 points, while the Dow gained 1.37 percent and ended Friday at 12,184.26 points.
The technology-heavy Nasdaq also ended 0.76 percent up at 2,646.85 points.