Sensex recovered some of the losses and finally closed 561.22 points down to close at 34,195.94. Nifty too slumped 168.30 points to finally close at 10,498.25.
The BSE Sensex had opened over 1,000 points lower while the Nifty opened about 300 points in the red.
Selling was led by Realty, Consumer Durables, Banks, Financials, Metal, Industrials, FMCG, Auto, IT, Teck, Power, Telecom, Energy and Utilities.
Indian markets followed Wall Street, which suffered its biggest intra-day decline in history.
Dow Jones Industrial Average index dropped by 1,175 points. The fall is also the largest fall in percentage terms for the Dow since August 2011. US investors were fretting over rising borrowing costs.
At 1:15 pm, Sensex was hovering around 900 points down and Nifty was over 270 points in the red.
Major losers were Tata Motors 5.19 per cent, Axis Bank 4.78 per cent, Tatamtrdvr 4.16 per cent, Yes Bank 4.08 per cent and HUL 3.65 per cent.
Foreign portfolio investors (FPIs) sold shares worth Rs 1,263.57 crore on net basis while domestic institutional investors (DIIs) bought equities to the tune of Rs 1,163.64 crore on Monday, provisional data showed.
Shares in other Asian markets were also under strong selling pressure, with Japan’s Nikkei down about 5 per cent. According to Reuters, it was Nikkei’s worst point drop since November 1990.
Tokyo led a collapse throughout the region, diving 6.5 percent, while Hong Kong was down almost 5 per cent and Sydney sank 3.5 percent.
The heavy selling comes after months of surges fuelled by optimism over the U.S. economy, corporate earnings and the global outlook.
(With inputs from agencies)