The broader Nifty too suffered losses but managed to end above the 11,000-level.
Caution prevailed for the second session in a row as participants were unwilling to expand their portfolios and looked to the Budget for further cues, brokers said.
The 30-share Sensex remained in the negative zone for the major part of the session and lost 68.71 points, or 0.19 per cent to finish at 35,965.02. Intra-day, it shuttled between 35,818.41 and 36,050.69.
The index had retreated from its lifetime high by falling 249.52 points in the previous session.
The broad-based NSE Nifty hit a low of 10,979.30 intra- day, before closing at 11,027.70, down 21.95 points, or 0.20 per cent.
On a monthly basis, the flagship BSE Sensex went up by 1,908.19 points or 5.60 per cent, while the NSE Nifty recorded a hefty rise of 497 points, or 4.71 per cent.
"Investors are awaiting the big budget day while the expectation for this budget is muted compared to what was anticipated over the last two years.
"The main requirement is to have a good balance between fiscal discipline and growth reforms. Rural economy will be the key in the budget but infrastructure development and reforms are also likely to be highlighted. Some tinkering can be expected on corporate and individual taxation fronts," said Vinod Nair, Head of Research, Geojit Financial Services.
According to provisional figures, foreign portfolio investors (FPIs) sold shares worth Rs 105.56 crore on net basis while domestic institutional investors (DIIs) also offloaded equities to the tune of Rs 281.65 crore yesterday.
Meanwhile, drug major Dr Reddy's emerged as the worst performer among Sensex constituents by plunging 3.75 per cent, followed by Tata Steel at 3.49 per cent.
Other laggards were HUL, Sun Pharma, Coal India, Infosys, ITC Ltd, TCS, Wipro, L&T, Power Grid, Maruti Suzuki, Bharti Airtel, ONGC, Axis Bank, Bajaj Auto and SBI, falling up to 2.62 per cent.
Bucking the trend, Kotak Mahindra Bank, RIL, HDFC Ltd, IndusInd Bank, Tata Motors, Yes Bank, Asian Paints and ICICI Bank finished with gains.
Sector-wise, the BSE healthcare index fell the most at 1.62 per cent, followed by FMCG 1.25 per cent, metal 1.25 per cent, capital goods 1.12 per cent, IT 1.10 per cent, consumer durables 0.98 per cent, teck 0.86 per cent, infrastructure 0.56 per cent and PSU 0.39 per cent.
Oil & gas and bankex managed to close in the green.
Selling activity gathered momentum in the broader markets, pulling down the BSE mid-cap index by 1.29 per cent and the small-cap 0.83 per cent.
In Asia, Japan's Nikkei ended lower by 0.83 per cent, while Shanghai Composite Index shed 0.21 per cent. Hong Kong's Hang Seng, however, rebounded 0.86 per cent.
European shares were trading higher. Major indices in France and Germany were up by 0.26 per cent and 0.32 per cent, respectively ahead of US Federal Reserve's interest rate decision. UK's London's FTSE also moved up 0.08 per cent.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)