Reversing all the gains made in the previous session, the benchmark Sensex slumped over 500 on Friday as foreign investors began offloading their shares aggressively ahead of crucial US employment data.

The BSE Sensex plunged by 562 points or 2.2% to close at 25,201 points, while the NSE Nifty fell 168 points or 2.1% to trade at 7,655 points.

The sell-off was mainly triggered by continued concerns over the interest rate hike by the US central bank in September.

An employment data for the month of August is scheduled to release on Friday, 4 September, in the US and an uptick in jobs data is expected to heighten expectations of rate hike by the US Federal Reserve this month -- a major negative for emerging markets like India.

"Our analysis suggests that last month's readings on job creation and unemployment will be consistent with "some" further improvement in labor markets that, along with an above-consensus hike in average hourly earnings, will support our call for a liftoff in administered rates at the upcoming Federal Open Market Committee (FOMC) gathering," said Societe Generale in a note.

The Federal Reserve's two-day meeting will take place on 16-17 September and any strong hint on rate increase or announcement about a hike in policy rates is expected to lead to weakening of emerging market currencies, including the Indian rupee. A fall in the rupee might trigger heavy outflows from the country.

"If the data is strong, then the US Federal Reserve may increase interest rates on September 18. There will be further downside to emerging markets (EMs) if it does so," Micheal Every of Rabobank told CNBC-TV18.

The Asian shares also fell sharply on the day, with Japan's Nikkei trading lower by nearly 2% and Hong Kong's Hang Seng Index trading 0.34% down.

Top Losers & Gainers Today

Banking, auto, real estate and metal stocks witnessed heavy selling today, with the corresponding sectoral indices dropping in the range of 2-4% each. While just 2 out of 30 Sensex stocks posted gains, 3 out of 50 stocks in the Nifty index ended in green.

Stock prices of HDFC, ICICI Bank, HDFC Bank, Axis Bank and SBI closed down 2.4-3.5% each. IT stocks also ended in red ahead of the US employment data release. Infosys, Wipro and TCS shared fell over 2% on profit booking.