The withdrawal of DMK support from the government dampened the mood, with worries over Cyprus, pulling the Sensex lower by 285 points, while the Nifty ended with losses of 89.30 points.
The RBI's Monetary policy, which hinted at limited room for easing also saw selling pressure aggravating in stocks.
Among the top losers in trade today were Jindal Steel, Mahindra and Mahindra, Sterlite Industries and Hindustan Unilever.
The Bank Nifty was amongst the worst performing index with most of the major names from the banking sector declining, after the RBI hinted at limited measures for easing.
Banking sector stocks that lost ground were Bank of India, Canara Bank, HDFC Bank, Bank of India, Union Bank and Yes Bank.
The Realty pack also saw some unwinding with prominent losers from the pack being Anant Raj Industries, DLF Ltd, DB Realty and HDIL all ending with losses of more then 3 per cent. This was largely on account of inability of further monetary easing that could not be helpful for real estate companies.
SKS Microfinance was one of the stocks that showed resilience and ended flat after reports that the Supreme Court has allowed the company to resume operations in Andhra Pradesh.
Mid cap stocks also saw heavy selling pressure in line with the index stocks. Among the prominent losers from the space were Bata India, Crompton, IFCI, Sintex, Punj Lloyd, United Phosphorus, Welspun and Jain Irrigation.
Meanwhile, markets in Europe were trading lower after worries over the Cyprus bailout package, raised fears that the contagion could spread to other regions. Most of the Asian markets ended the day higher, following large scale selling pressure on Monday.