The domestic stock markets witnessed their biggest fall in over a month as investors booked profits on fresh concerns about the financial sector and fears of a flu pandemic dampening sentiment worldwide.
Equity markets cracked around the world on media reports that US financial giants would still need to raise huge funds to come out of their financial mess.
The 30-share benchmark Sensex of the Bombay Stock Exchange fell 3.25 per cent, or 370 points, to close at 11,001. The broader index S&P CNX Nifty of the National Stock Exchange was down 3.10 per cent, or 108 points, to close at 3,362.
Banking sector stocks led the fall in the domestic markets. The banking sector index on the BSE, which had jumped more than 53 per cent over the past seven weeks, fell 5 per cent, its worst drop since March 30.
Provisional figures on the BSE showed that both domestic and foreign institutional investors were net sellers of Rs 256 crore and Rs 202 crore, respectively.
The benchmark indices in France, Germany and the UK were down by 1.9 to 2.54 per cent. Other top losers in Asia included Seoul Composite, which was down 2.95 per cent and Nikkei 225, which slumped 2.67 per cent to its lowest close in almost a month, as the yen surged.
Among major US indices, the Dow Jones Industrial Average rose 0.59 per cent, S&P 500 rose 0.50 per cent and Nasdaq 0.29 per cent.
"The impact of the flu is more psychological and it's too early to judge its repercussions for stock markets. However, the real reason is that markets have become too fragile. In fact, the derivative open interest position in the domestic markets is near peak levels. This indicates that markets were in an over-bought zone for the short-term and a sharp fall is expected," said Deepak Sawhney, research head at Mumbai-based Networth Stock Broking.
Ved Prakash Chaturvedi, chief executive officer of Tata Mutual Fund, however, said the fall is temporary. "Although the correction was due to fears of epidemic and concerns over the state of US banks, the fall is more of profit booking. People are cutting some derivative positions ahead of expiry and holiday due to elections."
Financial sector stocks such as ICICI Bank (down 6.11 per cent at Rs 439), HDFC Bank (down 4.01 per cent at Rs 1070), and State Bank of India (down 3.29 per cent at Rs 1,240) fell after The Wall Street Journal reported that US regulators were pushing Bank of America and Citigroup to raise more capital.
The report also said Bank of America and Citigroup are both challenging the findings. The Wall Street Journal also said Wells Fargo & Co, Fifth Third Bancorp and Regions Financial Corp. are all expected to need more capital. The Financial Times reported that Britain's largest banks may be forced to adopt higher capital ratios.
Reliance Industries, the most weight index stock, eased 2.7 per cent to Rs 1,736.75. Overall, losers led advances in the ratio of almost 3:1 on a relatively low volume of 375.1 million shares traded.