The domestic benchmark equity index closed 240 points down on Friday, following a huge sell-off in other Asian markets.
The BSE Sensex fell 241 points or 0.88% to end the day at 27,366 points, paring some of the losses it witnessed in the early trading session.
"I think we're seeing real panic right across the market," Micheal Every of Rabobank told moneycontrol.com.
Banks, capital goods, auto and metal stocks are the biggest losers, falling in a range of 2-3% each. While the stock price of Tata Motors dropped 2.72% to Rs 332.90, Bharti Airtel shares fell by over 2%. Vedanta stock prices were down 3.4% to Rs 95.20.
The sell-off is mainly triggered by concerns over the growth in the world's second largest economy -- China -- after a data showed that the manufacturing activity in the country fell to its six-and-half year lows in August.
A flash reading for China's purchasing managers' index (PMI) declined to 47.1 in August, indicating continued weakness in the country's factory activity.
"The Caixin Flash China General Manufacturing PMI for August has fallen further from July's two-year low, indicating that the economy is still in the process of bottoming out," said He Fan, chief economist at Caixin Insight Group.
Further, Chinese economic data published earlier this month were below the market estimates, highlighting the need for stimulus to boost the sagging economy. Concerned over the weak data, the Chinese authorities opted for yuan devaluation to give a fillip to the weakening exports from the country.
Meanwhile, the Indian rupee also depreciated to two-year lows despite a weakness in US dollar. The US dollar depreciated against other major currencies as expectations over interest rate by the US central bank in September were pushed back recently.