The Sensex nosedived over 1,000 points while the Nifty slumped to the 16,200-level on Friday as investors dashed to safer assets as hardening crude oil prices fanned inflation fears and triggered a global sell-off.
With unrelenting foreign fund outflows, the rupee plunged to a fresh lifetime low against the US dollar, further denting sentiment.
The 30-share BSE Sensex opened weak and stayed in the negative territory throughout the session. It finally ended 1,016.84 points or 1.84 per cent lower at 54,303.44.
Similarly, the broader NSE Nifty plunged 276.30 points or 1.68 per cent to 16,201.80.
Investors lost Rs 3.11 lakh crore in Friday's session, with the market capitalisation of all BSE-listed companies falling to Rs 2,51,84,358.86 crore.
Kotak Mahindra Bank was the top loser in the Sensex pack, skidding 3.96 per cent, followed by Bajaj Finance, HDFC, Reliance Industries, Wipro, Tech Mahindra, Infosys and Tata Steel.
On the other hand, Asian Paints, Dr Reddy's, UltraTech Cement, HUL, Titan, Maruti, Nestle India and NTPC finished with gains of up to 0.78 per cent.
"Rising inflation fears gripped the domestic market leading to heavy sell-off ahead of the release of US inflation data and Fed policy meet next week. The inflation data will be crucial to sense the quantum of a rate hike.
"European Central Bank in its policy meeting signalled to start rate hike from next month and a large change in September. Persisted foreign fund outflow and widening trade deficit due to the elevated oil prices led to depreciation of INR, weakening the sentiment," said Vinod Nair, Head of Research at Geojit Financial Services.
International oil benchmark Brent crude climbed 0.45 per cent to $123.62 per barrel.
The basket of crude oil that India buys has hit a decade high of $121 per barrel, but retail selling prices of petrol and diesel continue to remain frozen.
The Indian basket on June 9 touched $121.28, matching levels seen in February/March 2012, according to data available from the oil ministry's Petroleum Planning and Analysis Cell (PPAC).
On a weekly basis, the Sensex tumbled 1,465.79 points or 2.63 per cent, while the Nifty lost 382.50 points or 2.31 per cent.
"The equity market across market caps and sectors traded lower on account of a number of proximate factors, which are mainly global factors. This has been the broader trend during the course of the week gone by.
"The Fed meeting next week, the results of which will be known to by June 14th evening, is also a major event the market is looking forward to, and most analysts expect a hike of 50 bps...," said Joseph Thomas, Head of Research, Emkay Wealth Management.
While the FII exit from the local market continued unabated, the RBI policy announced this week put the focus on normalisation of liquidity and withdrawal of accommodative policy, both of which may have a negative impact on the markets in the coming weeks, he added.
Sector-wise, BSE IT, teck, bankex, finance and oil & gas lost up to 2.09 per cent on Friday, while telecom logged gains.
In the broader markets, the BSE midcap, large-cap and smallcap gauges slipped much as 1.72 per cent.
The rupee declined 11 paise to close at a record low of 77.85 (provisional) against the US dollar on Friday.
Following a massive sell-off in the US market, bourses in Tokyo, Hong Kong, and Seoul ended sharply lower, while Shanghai settled in the green.
Equities in Europe were witnessing intense selling pressure in mid-session deals after ECB's rate hike comments.
Foreign institutional investors (FIIs) remained net sellers in the capital market, offloading shares worth Rs 1,512.64 crore on Thursday, as per exchange data.