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.
The Competition Appellate Tribunal (Compat) will hear tomorrow an appeal by realty major DLF against a Competition Commission order, wherein the company has been asked to pay a penalty of Rs 630 crore for abuse of dominant market position. DLF slipped 3.5% to Rs 234.
Oil marketing companies are soft after IOC chairman R.S. Butola told television network NDTV that Indian state run oil marketing companies may cut gasoline prices by November 16.
HPCL, BPCL and IOC have slipped 4-5% each. Indian Oil Corp today reported a net loss of Rs 7,485.55 crore (Rs 74.85 billion) for the quarter ended September 30 due to mounting losses on fuel sales.
This was in sharp contrast to the net profit of Rs 5,293.95 crore (Rs 52.93 billion) posted by the company for the year-ago period, IOC said in a statement.
Meanwhile, BSE FMCG index rose 1% to 4,232 as Hindustan Unilever touched a new high and ended up 3%. ITC added 0.7% at Rs 212.
IT shares also went up in late noon deals. TCS and Wipro advanced around 2% each. TCS subsidiary, Diligenta, announced that it will assume administration responsibility for 3.2 million policies for Friends Life, a provider of pensions, investments and insurance.
The agreement, effective from March 1, 2012 is worth $2.2 billion (£1.37 billion) over 15 years.
Hero Motocorp, Jindal Steel, Bharti Airtel and Jaiprakash Associates advanced in trades as well.
BSE market breadth has turned negative. Out of 2,974 stocks traded, 1,876 shares declined while 993 shares advanced in trades.