Besides, the falling rupee added to investor woes, especially those who have parked funds in imports-linked sectors. The rupee fell to 28-month low at 49.90 per dollar and was the worst performer among Asia’s 10 most-traded currencies, brokers said.
Metals, capital goods, auto, consumer durables, banking and refinery stocks were hit hard.
RIL, HDFC Bank, HDFC, L&T, Tata Motors, Infosys, Tata Steel and Hindalco contributed over 150 points to the fall.
After falling 704 points yesterday, the worst single day performance in 26 months, the 30-share BSE barometer opened weak and dipped to a low of 16,052.47, losing 300 points on the back of weak Asian trend as US markets plunged.
However, there was some buying by domestic funds at lower levels amid positive openings in European markets as G-20 group of countries said they will work together to resolve the debt problems.
Sensex rebound to a high of 16,368.41, but fell again on late profit-booking to close at 16,162.06, down 199.09 points or 1.22 per cent.
The broad-based NSE 50-issue Nifty also slumped 55.90 points or 1.14 per cent to 4,867.75.
Globally, Dow Jones and Nasdaq plunged 3.51 per cent and 3.25 per cent yesterday. The US Federal Reserve has given a gloomy view on the American economy. Besides, weak Chinese economic data and escalating debt crisis in the euro zone, especially Greece, sent global stocks crashing.
"We are in a tough global situation with the US and Europe at the centre of the turbulence. Emerging markets like India and China are better placed but cannot remain insulated from that mess," said Amar Ambani, Head of Research, IIFL.
FIIs dumped shares worth Rs 1,234.60 crore yesterday as per Sebi data.
Asian markets extended Thursday's heavy losses, with key indices from China, Hong Kong, Singapore, South Korea and Taiwan ending lower between 0.41 per cent and 5.73 per cent. The Japanese market was close.
European stocks washed out early gains and were down in the afternoon. The CAC was down 0.99 per cent, the DAX (0.58 pc) and the FTSE (0.33 pc).
Back home, 19 of the 30 Sensex scrips closed in the red while others finished in the green. The top heavyweight Reliance Industries (RIL), after plunging 6.16 per cent yesterday, declined further by 2.0 per cent.
Other major losers were Tata Motors (4.81 pc), Hindalco (3.77 pc), HDFC Bank (3.10 pc), L&T (2.70 pc), HDFC (2.65 pc), Her MotoCorp (2.45 pc), Coal India (2.35 pc), Tata Steel (2.22 pc) and ICICI Bank (2.19 pc).
Among sectoral indices, BSE-Metal dropped 2.28 per cent, Capital Goods (1.84 pc), Auto (1.59 pc), Consumer Durables (1.44 pc), Bankex (1.35 pc) and Oil&Gas (1.34 pc).
The total market breadth at BSE remained weak as 1,805 stocks closed with falls, while 986 ended with gains. The total turnover was low at Rs 2,644.44 crore, from Rs 2,818.81 crore yesterday.