Sensex dropped from the opening level of 4007.43 and touched the intra-day low of 3917.90 but recovered partially to finish at 3945.13 with a net loss of 77.07 points compared to the previous level of 4022.20. The BSE-100 index lost 31.98 points to 1739.34 from the previous level of 1771.32.

Other stock exchanges in Calcutta, Delhi and Madras also encountered selling pressure. On the National Stock Exchange, the NSE-50 opened at 1160.15, touched a low of 1100.10 and closed at 1132.25, showing a drop of 28.05 points from the previous close of 1160.30.

Market circles said software shares were the major losers apart fromindex-based scrips like Hindustan Lever, ACC, SBI, Reliance, Telco and others which crashed on selling pressure. FIIs were the main sellers while domestic institutions made token purchases of Tisco, Larsen, SBI and Hindustan lever. Almost all index based scrips dropped sharply, bringing down the Sensex.

The Skindia GDR index fell by 4.88 per cent to close at 901.89 points. "Market makers seem to be awaiting the US sanctions. Analysts seem to be closely studying the impact of these sanctions on the performance of the Indian companies," said Maneesh Gupta of Skindia Finance.

Gujarat Ambuja Cement GDR fell by 7.50 per cent to $7.40 during the mid-session on the London Stock Exchange. "Sanctions are likely to hit certain specific sectors like software, hence the EPS of these companies which reflect good growth potential, would be adversely affected," said a fund manager with a leading FII brokerage outfit.

Software shares were hit amid fears that trade sanctions may hurt booming exports, but analysts saidthe misgivings were far-fetched. "India is a very cheap source for software," said Devesh Kumar, head of research at ABN Amro Asia Equities (India) Ltd. "Sanctions may not necessarily work."

Analysts said apprehensions that concessional foreign aid may be halted would not cause much harm. "There is going to be an increase in the perceived investment risk in India but (foreign) investment does not constitute a substantially large portion of the country's gross domestic product," said an FII official.

"There might be some token sanctions... nothing of long-standing significant nature," said an official of brokerage Kaji & Maulik Securities Pvt Ltd. The stock market would feel the pinch in the short-term as investors stayed on the sidelines. "India has been one of the top performing markets both from the stock and bond perspective from 1997 to date and sentiment now is likely to be negative," said a broker, adding, "But I don't think the fundamentals are going to change."

Marketmen rule out any major crashas domestic institutions and mutual funds are expected to step in to arrest any downslide. BSE president J C Parikh said that if the US imposes sanctions, the inflow of investment and funds will be restricted which automatically will affect market sentiments here.