Largest private sector lender ICICI Bank led the losses in the main index as sentiment towards the financial sector was dented by a deepening banking crisis in the United States.

Leading outsourcers Tata Consultancy Services, Infosys Technologies and Wipro fell after their client Nortel Networks filed for bankruptcy, even though the North American telephone equipment maker contributed only a tiny portion of their revenue.

The main 30-share BSE index dropped 323.75 points to to 9,046.74, its lowest close since Dec. 5. Twenty-seven of its components fell, while in the broader market, losers swamped gainers 2.3:1 on above average volume of 274.1 million shares.

Jayesh Shroff, fund manager at SBI Mutual Fund, said deteriorating asset and credit quality of banks in the United States and grim economic data in that country weighed on market sentiment.

"This is having a spillover effect here as well... credit conditions could worsen. Though it is a problem located in the US we cannot be insulated from it," he said.

Shares in Asia hit a six-week low on the bleak US outlook and European stocks surrendered early gains and header lower.

ICICI fell 7.3 per cent to 408.85 rupees, its lowest close since Dec. 11, while market leader State Bank of India lost 4.4 per cent to 1,146.75 rupees. The BSE Bankex closed down 5.7 per cent.

Traders said a drop in annual inflation to an 11-month low, which would give the central bank more elbow room to lower rates again, was ignored by the market.

"The sentiment has been negative since morning on account of the US data and weak Asian markets. In such an environment positive effect of inflation falling is completely ignored," said Arun Kejriwal, director, Kris Research.

Satyam slumped 32.2 per cent to 20.30 rupees after a finance ministry official said there was no plan for a government bailout package for the outsourcer, which last week revealed India's biggest corporate scandal.

Infosys fell 4.1 per cent to 1,252 rupees and Wipro dropped 3.6 per cent to 235.30 rupees even after both companies said the trouble at Nortel would not affect their financials.

Infosys said Nortel contributed to less than half a per cent to its yearly revenues and would not have a material impact on its operations or financial condition.

Wipro said Nortel accounted for less than 1.5 per cent of its technology revenues and expected that a major portion of its business would continue.

"People are shaky. They feel more such unexpected events could spring up," said Jigar Shah, senior vice president at Kim Eng Securities.

Tata Consultancy closed down 5.3 per cent at 510 rupees. The company is expected to announce quarterly earnings at around 1200 GMT. A Reuters poll had forecast December quarter profit should have risen 6.1 per cent.