Sensex closed at 17,501; down 364 points or 2% from the last close. And Nifty closed at 5,257, down 108 points or 2%.

The denial of bail to Kanimozhi and the removal of R-Com and Reliance Infra from the Sensex also affected the sentiment. FII outflows in recent days and a weaker rupee added fuel to the fire.

The Indian markets were spooked after several media reports said that India and Mauritius will restart talks on a tax treaty.

However, the indices staged a smart recovery in late morning trades after the Government. Reports also quoted a source in the Mauritius government as saying that the DTAA with India was not being re-negotiated.

The fall in the stock market was led by RCom and Reliance Infra which slipped 8% and 6% respectively after the BSE said it will exclude these two stocks in the Sensex from August 8.

On the other hand, shares of Sun Pharma ended almost flat and Coal India rose by 0.3% on the BSE today. Both these stocks will replace RCOM and Reliance Infra on the Sensex.

The index heavyweight Reliance Industries hit 2009 year lows. The stock dropped 4% to end at Rs833. The stock had opened at Rs875, which also was the days high; it fell as low as Rs828.

Shares of TCS were also hit after reports circulated in the media that the Income-Tax (I-T) department has asked India's largest software services exporter to pay Rs 6.56bn. Shares of GTL and GTL Infrastructure nose dived in early hours of trade amid a massive spurt in traded volumes on media speculation that promoters have sold shares in the open market. However, the company's Chairman and MD denied any problem with the two companies' business. (You can read more on the story here).