Snapping a rally that went on for as many as six trading sessions, the S&P BSE Sensex fell 190 points on Thursday, as investors took profits at higher levels.
The Sensex closed at 26,845 points while the 50-share Nifty dropped by 48 points, or 0.59%, to end at 8,129 points.
"Just when we thought that Nifty was all geared up to rally towards the 8300 mark, indices took a breather. After the Hanging Man candle stick pattern which is considered as the reversal sign, Nifty has further formed a bearish engulfing pattern today which indicates that additional selling pressure could be in store," said Amar Ambani, Head of Research, IIFL.
The sell-off was also partly led by weak global cues. Official data showed that Germany's exports plunged in August, indicating weak external demand.
"Germany's trade surplus shrunk in August as exports plummeted. Both exports and imports collapsed during the month, with exports falling almost twice as fast as imports, probably reflecting the weakness in sales to Asian emerging countries," said Barclays Capital in a note.
Japan's Nikkei fell by nearly 1% after the release of machinery orders data that showed a more-than-expected decline in the orders. However, China's Shanghai Composite ended 3% higher after a week-long public holiday.
Among the BSE sectoral indices, FMCG and healthcare were the top losers, while metal and consumer durables indices ended in green.
Tata Steel (up 1.7%), Tata Motors (up 0.6%), Hindalco Inds (up 0.5%), BHEL (up 0.5%) and Ambuja Cements (up 0.4%) were the top gainers among Sensex stocks.
Top losers were Reliance Industries (down 2.7%), ITC (down 2.3%), Reliance Capital (down 2%), ICICI Bank (down 1.6%) and NTPC (down 1.4%).
"Reliance Industries ended lower by 3% at Rs. 890 on reports that draft prospectus from DeGolyer and MacNaughton (D&M) indicated that there was extraction of gas by RIL from ONGC's KG block. The government is planning to seek legal opinion on compensation from RIL to ONGC," said Ambani.
Banking stocks also came under pressure following a rally in the past few trading sessions led by higher-than-expected repo rate cut by the Reserve Bank of India (RBI) last week. ICICI Bank, Axis Bank, Yes Bank and HDFC were down 1-1.5% each.
Major IT stocks also traded weak amid a recent rebound in rupee, which ended at a two-month high on Wednesday. While TCS shares ended 0.8% lower, Infosys stocks were down 0.1%.
However, HCL Tech shares were up 1.3%, rebounding from an eight-month low hit in the previous session. HCL Tech stocks plunged by 16% in the four trading sessions after the company said that its revenue would be hit by a slew of factors.
Tata Motors shares extended gains for the fourth straight session, ending 0.7% higher. Stock prices of Force Motors soared 7%, reaching their highest level since 5 August.
On the commodities front, gold prices declined sharply by Rs 200 to Rs 26,650 per 10 grams, while silver prices fell Rs 550 to Rs 36,700 per kg.