India's October IIP contracted by 5.1% from a year earlier after a revised 2% in September, the Central Statistical Office said.
The de-growth in industrial production is the most since March 2009 when it contracted 5.2%.
The IIP data for October 2010 was 11.4 per cent.
Manufacturing output, which constitutes about 76 per cent of the industrial production, fell by an annual 6 per cent, the Statistical Office said.
The Bombay Stock Exchange's 30-share Sensex closed at 15,870 -- down 343 points.
The National Stock Exchange's 50-share S&P CNX Nifty closed down 102 points at 4,764.
"The IIP numbers are a clear indication of the fact that the slowdown has taken deep roots in the Indian economy.
Against this backdrop, I think expectations of 7% GDP growth this year would be very, very optimistic," says Jagannadham Thunuguntla, Strategist and Head of Research at SMC Global Securities.
The losses were led by index heavyweight Reliance Industries along with bank, capital goods and metal shares.
Investors would be eyeing the third advance tax numbers, due on Thursday, for direction. Further, investors are keenly awaiting Reserve Bank of India's mid-quarter monetary policy review on December 16.
Reliance Industries extended losses for the third straight session to end at Rs 728 down 3.6%.
"RIL is the counter which can drag the markets down from these levels as well, its had started to show tremendous weakness, we expect the stocks to touch near sub 700 levels in coming days.
"Its not been able to maintain above its crucial 800
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