Although the net decline, according to market experts, was in line with the necessary technical correction anticipated earlier, the volatile intra-day movement of the Sensex in the band of 3,320.11 points and 3,461.12 points -- the intra-day low and high respectively -- came as a rude shock to the market.

The Nifty Index also registered a net loss of 15.80 points to close at 964.35 points.

The fall in the Asian market indices by over 2 per cent during mid-session accompanied by rumours of a likely fall in the value of their currency saw local operatorsrush to cover their risk.

"Optimism seems to have vanished from the local markets," said a BSE broker while explaining the sharp decline after mid-session.

According to market sources, Jardine Fleming brokerage firm was rumoured to have sold huge chunks of SBI and HLL which reflected in the sharp decline of the indices. However, the figures on institutional transactions released by NSE at the end of the day show that the FIIs were net buyers on the bourse. FIIs bought stocks worth Rs 22.62 crore on the NSE, while the local funds placed buy orders to the tune of only Rs 15.20 crore. Net FII sales on the BSE stood at Rs 15 crore.

Interestingly, market sources highlighted the strategy used by FIIs, which meant dumping sales on the BSE platform on the first day of its trading cycle, while restricting their purchases to NSE's platform. FIIs like Morgan Stanley were rumoured to have sold a huge chunk of their holding in ITC for the third consecutive day today.

Another prominent feature of the day was thehuge sales made by local operators at the counters of second line infotech stocks. While Infosys Technologies, NIIT and Satyam Computers dipped by 2 per cent on an average, Square D Software, Onward Technology, Silverline Industries and Software Solution were locked at the lower limit of the price band on the NSE.The drastic change in the market perception, however, failed to check the northward move of Philips, Nocil, Carrier Aircon and Bata India.

While a section of market participants attributed the Asian market meltdown as the main reason for the fall in the local indices, technical analysts described it as an inevitable correction. However, analysts also highlighted the need of a crucial support at 3,450 points.

The index has already tested the 3,316 level. Now, it should find the gap support of 3,269 points during this week," he explained. Despite a fall of 2 per cent in the Sensex, the short positions on the BSE have shot up from Rs 100 crore to Rs 129 crore.