Weak markets across Asia and Europe added to the sell off.

Traders said investors would follow world markets for direction in the coming weeks, with foreign portfolio flows setting the trend after an unexpectedly easy victory for the ruling coalition in general elections triggered a jump.

"The euphoria was bound to come down; reality had to set in," said Gajendra Nagpal, chief executive of Unicon Financial Intermediaries. "Whatever takeaway was possible due to the elections is done. We will now be dancing to global tunes."

Engineering conglomerate Larsen & Toubro and government-run firms such as State Bank of India fell, after soaring about 36 per cent over three days on hopes the government will push asset sales and infrastructure spending.

Financials such as ICICI Bank and energy giant Reliance Industries fell as optimism over a revival in the global economy waned after the US Federal Reserve cut economic growth forecasts.

The 30-share BSE index ended down 2.31 per cent, or 324.12 points, at 13,736.54, after turning briefly positive at one stage. Twenty-four stocks declined.

The benchmark had jumped by more than three-quarters from 2009 lows in early March, stoking concerns the market was overbought.

Annual inflation edged up to 0.61 per cent in early May on higher food and metal prices, but analysts said it could turn negative in June and give more freedom to the central bank to cut rates for stimulating a slowing economy.

Jyotinder Kaur, an economist with HDFC Bank, said a rise in food items was the prime reason for inflation picking up but it was still expected to dip below zero.

"It is going to be negative possibly by the end of May or the first week of June," she said.

Private-sector lender ICICI Bank fell 5.15 per cent to 672.30 rupees, while Reliance Industries, which has the biggest weight in the main index, dropped 1.6 per cent to 2,116.80 rupees.

Larsen & Toubro shed 8.6 per cent to 1,242.60 rupees, while leading lender State Bank of India eased 3.7 per cent to 1,714.30 rupees as analysts believe moves such as privatisations and an increase in infrastructure spending will take time.

In the broader market, gainers led losers in the ratio of more than 3:1 on heavy volume of 804.2 million shares.

Asian shares were weaker after a drop on Wall Street overnight. Japan's Nikkei fell 0.9 per cent, while MSCI's measure of other Asian markets lost 1.1 per cent.