Sensex drops 240 points to its lowest close since Dec. 8, worries over corporate earnings deepen

The market breadth was overall negative as 1597 losers outpaced 866 gainers and 69 closed unchanged.

Elsewhere, the broader 50-share S&P CNX Nifty index of the National Stock Exchange (NSE) closed 2.04 percent or 59.60 points down at 2857.25.

Government data released Friday showed that India's annualized inflation rate has fallen to a new 9-month low level of 6.61 percent, triggering hopes that it will give room to the central bank to push for a cut in key interest rates that will facilitate corporate borrowings and boost consumer spending.

However, optimism was outweighed by concerns of poor quarterly results due next month even as government data showed that advance tax paid by India Inc. had declined 22 percent to about Rs.42,600 crore in the quarter ending December over the corresponding period last year.

A growing war hysteria between neighbors India and Pakistan over Mumbai terrorist attacks in November also dampened market sentiments.

"On such a day, any bad news can ruin the way the market progresses. There was just no participation at all," said K.K. Mital, head of portfolio managed services at Globe Capital.