The Bombay Stock Exchange's 30-stock benchmark Sensitive Index, or Sensex, fell 250 points, or 2.3 percent, to 10,573, off an intraday low of 10,505. On the rival National Stock Exchange, the 50-share S&P Nifty fell 84 points, or 2.6 percent, to 3,116.
"Investors are scared. They don't like to be proved wrong in this volatile market," said Jayant Pai, vice president at Parag Parikh Financial Advisory.
Indian share prices have seen sharp falls and volatility over the past two weeks, tracking the trend in Asian markets amid fears of interest rate hikes and higher inflation. The Sensex has fallen 16 percent since hitting an all-time high of 12,612 on May 10.
"The Sensex tested the 11,000 mark today, but could not sustain the gains as investors preferred to take out whatever is on the table," Pai said.
Among blue chips Oil & Natural Gas Corp., or ONGC, fell 5.9 percent to 1,164.75 rupees and Reliance Industries lost 3.2 percent to close at 938.50 rupees.
Technology shares ended lower despite a fall in the rupee against the U.S. dollar, which is usually a positive for exporters.
Among software shares, Wipro Ltd. fell 4.3 percent to 452.95 rupees, while Infosys Technologies Ltd. declined 2.1 percent to 2,858.20 rupees.