The BSE benchmark Sensex snapped its three-day gains, plunging 383 points due to heavy selling mainly in financial and auto stocks as rising crude prices and rupee volatility spooked investors.
The flagship index swung nearly 880 points both ways on alternate bouts of buying and selling during the session.
The NSE Nifty too fell by 131.70 points to slip below 10,500-mark.
Intense selling pressure was witnessed in select counters led by auto, realty and oil&gas stocks.
Sentiments were also hurt by liquidity concerns that dragged down non-banking financial stocks.
Meanwhile in the forex market, the rupee after showing strength in early session at 73.37, slipped 13 paise to 73.61 against the US dollar (intra-day) too had its shadow on equities.
Overall sentiment was cautious as investors were on a wait-and-watch mode ahead of quarterly results from Reliance Industries, to be released later in the day, brokers said.
"Market slid below 10,500 mark as rise in oil price and volatility in the rupee influenced investors to book profit. Global market remain mixed ahead of the release of FOMC minutes later in the day to get cues about rate hike trajectory," Vinod Nair, Head of Research, Geojit Financial Services, said.
After a gap up opening at 35,543.38 points, the Sensex advanced to hit a high of 35,605.43 points in early trade on the back of better-than-expected Q2 earnings posted by tech major Infosys on Tuesday.
However, emergence of selling by investors across-the-board, mostly of a profit-booking nature, gave up session's gain to hit a low of 34,727.16 in late afternoon trade, before settling 382.90 points, or 1.09 per cent, down at 34,779.58.
The index had risen nearly 1,161 points in the past three sessions on the back of unabated buying by domestic institutional investors (DIIs) and rebound in global equity markets.
The broader NSE Nifty too dived by 131.70 points, or 1.24 per cent, to close at 10,453.05. Intra-day, it reclaimed the 10,700-mark to scale a high of 10,710.15 and a low of 10,436.45.
"A strong rupee and buoyant global markets set the stage for the Indian markets to trade cheerfully in the morning. Nifty did open with gusto, though could not sustain and fell more than 250 points from the highs," VK Sharma, Head PCG & Capital Markets Group, HDFC Securities, said.
Foreign institutional investors (FIIs) sold shares worth Rs 1,165.63 crore, while domestic institutional investors bought shares to the tune of Rs 1,059.44 crore on Tuesday, as per provisional data available on the BSE.
Shares of Reliance Industries after initial firmness, fell 1.27 per cent ahead of its September quarter results.
Hero MotoCorp ended 2.88 per cent down after the country's largest two-wheeler maker Tuesday reported a marginal dip in its standalone profit after tax to Rs 976.28 crore for the second quarter ended September 30.
Indiabulls Housing Finance, Dewan Housing Finance Corp and Repco Home Finance fell up to 13.17 per cent.
Shares of IT major Infosys surged 1.16 per cent after the company Tuesday posted a 10.3 per cent jump in its September quarter consolidated net profit at Rs 4,110 crore, helped by strong deal pipeline and traction in digital revenues.
Globally, other Asian markets were in a bullish mood and European shares too rose in their early session after upbeat US earnings and strong economic data drove a rebound on Wall Street.
Brent crude prices climbed 0.38 per cent to USD 81.72 a barrel, while WTI (West Texas Intermediate) crude up 0.26 per cent to USD 72.11 a barrel on decline in the US inventories.
Yes Bank was the worst performer in the Sensex pack, crashing 6.85 per cent, followed by Adani Ports - 5.41 per cent.
Other laggards included Maruti suzuki, Tata Motors, Tata Steel, SBI, M&M, Bajaj Auto, Axis Bank, ONGC, Vedanta Ltd, ICICI Bank, TCS, Bharti Airtel, Sun Pharma, HDFC Ltd, L&T, IndusInd Bank, NTPC, HDFC Bank and Asian Paint, falling up to 3.79 per cent.
"Automobile stocks were also prominent losers as many feared lower sales in this festive season on fears of rising insurance costs and lower liquidity from NBFCs," Sharma said.
However, gains in ITC Ltd, Coal India, Wipro, HUL, PowerGrid and Kotak Bank cushioned the fall.
In the Asian region, Japan's Nikkei rose 1.29 per cent, Singapore up 1.73 per cent, Korea gained 1.04 per cent, Indonesia up 0.61 per cent and Shanghai Composite advanced 0.60 per cent.
European markets were also trading in the positive zone. Germany's Frankfurt and France's Paris CAC 40 moved up by 0.43 per cent and 0.51 per cent, respectively, in late morning deals. The UK's FTSE too inched up by 0.22 per cent.
Back home, the BSE realty index emerged as the worst performer, losing 3.17 per cent, followed by auto 3 per cent, infrastructure 2.59 per cent, oil&gas 2.42 per cent, metal 2.04 per cent, PSU 1.97 per cent, bankex 1.81 per cent, capital goods 1.60 per cent, healthcare 1.56 per cent, power 1.25 per cent, consumer durables 1.17 per cent and teck 0.23 per cent.
However, FMCG index rose 0.11 per cent.
A similar trend was witnessed in the broader markets as investors preferred to take away profits after recent gains pulling down the small-cap index by 2.47 per cent and mid-cap by 2.36 per cent.
Stock exchanges will remain closed tomorrow on account of "Dussehra".