The Sensex dropped 207 points to end at 17,362. The Nifty ended down 68 points to 5,221.
Meanwhile, Asian markets edged higher as Italian Prime Minister Silvio Berlusconi said late on Tuesday that he would step down after parliament passes budget reforms.
Greece, meanwhile, was struggling to create a consensus government under a new prime minister. Nikkei added 1% to 8,755. Hang Seng and Shanghai Composite advanced 1-2% each.
BSE bankex dropped 2.6% to 11,020 after after the rating agency downgraded the outlook for the Indian banking system.
Moody's Investor Service downgraded its outlook for India's banking system to "negative" from "stable", as it warned of slowing growth at home and overseas hitting asset quality, capitalisation and profitability.
Banking major, State Bank of India reported 12% year-on-year growth in standalone net profit at Rs 2,180 crore (Rs 21.80 billion).
India's largest public sector bank had reported a net profit of Rs 2,501 crore in a year ago period. Net interest income grew 28% to Rs 10,422 crore (Rs 104.22 billion) on y-o-y basis. The stock was the biggest dragger in the Sensex - down 6.7% at Rs 1,863.
Maruti Suzuki dropped 3.8% at Rs 1,080 as records showed a disappointing sales growth in October. Sun Pharma and Cipla from the pharma pack and metal stocks - Sterlite and Tata Steel dropped 1-3% each.
Aurobindo Pharma reported a consolidated net loss of 80.16 crore for the quarter ended September 30, 2011, as both domestic and export
sales dwindled among other factors. The stock slipped 3.5% to Rs 119.