Globally, crude oil prices inched closer to $80 per barrel, stoking fears of rising import bills and worsening fiscal deficits for energy importers like India.
BJP legislature party leader B S Yeddyurappa was sworn in as the chief minister of Karnataka for the second time, after an overnight high-voltage legal battle in the Supreme Court.
Trends at other Asian markets, however, was better as investors kept a cautious watch on developments in US-China trade negotiations.
The Sensex fell 495.61 points or 1.37% from its intra-day high to close the session at 35,543.94. The indices had, however, opened on a positive note. This is the fourth straight decline for the 30-share Sensex.
Meanwhile, the benchmark BSE Sensex rose 122.13 points, or 0.34 per cent, to 35,510.01 in morning trade. "However, interventions from RBI may curb steep fall in rupee and are likely to give support to the market", said Vinod Nair, Head of Research, Geojit Financial Services. However, it slipped on profit-booking and touched a low of 35,087, before finally settling at 35,149, down 238 points, or 0.67 per cent.
Sectoral indices led by capital goods, IT, teck, oil and gas, banking and PSU were trading in the negative zone.
Other laggards were Sun Pharma, Tata Motors, Tata Steel, Wipro, Maruti Suzuki, ONGC, Coal India, M&M, Adani Ports, Axis Bank, Bharti Airtel, Reliance Industries, NTPC, HDFC Ltd, HDFC Bank, Power Grid, Dr Reddy's and Infosys, falling up to 3.21 per cent.
Hong Kong's Hang Seng advanced 0.22 percent while Japan's Nikkei was up 0.25 percent in early trade.
The US Dow Jones Industrial Average, however, ended 0.22 percent down in Thursday's trade. The Bank Nifty fell 0.41%.