The markets plunged after hitting a new high of 11,931 on Friday.
The Sensex crashed by nearly 366 points in intra-day trade to as low as 10,565, owing to rumours that Sebi had banned 11 foreign institutional investors.
However, it recovered losses after Sebi denied the news.
The Sensex finally closed at 11,589, down 157 points.
The Nifty lost 56 points to close at 3,455.