The rupee dived 19 paise to 67.41 against the US currency amid fresh bouts of dollar demand.
The domestic currency had closed at a fresh three-month high overnight, largely outperforming several emerging market currencies since the beginning of this year.
Renewed dollar demand from importers and corporates in the face of bullish dollar sentiment overseas predominantly added pressure on the local currency.
Suspected intervention by the Reserve Bank of India in the foreign exchange market to stem the rupee appreciation, which impacts export competitiveness, also weighed on trade, said a forex dealer.
The RBI Monetary Policy Committee (MPC) today began its third review meeting amid mixed expectations of possible rate cut tomorrow.
Expert opinions were divided if the RBI Governor-led panel will recommend cut in interest rate by 0.25 per cent to give fillip to growth or maintain status quo because of inflationary pressure from rising oil prices.
Meanwhile, the greenback staged a dramatic recovery against the major currencies in late Asian trade -- its biggest advance in nearly three weeks in the midst of growing speculation about an imminent Fed rate hike.
The domestic unit resumed lower at 67.29 from Monday's closing value of 67.22 at the foreign exchange (forex) market.
It remained under immense pressure throughout the day and drifted to a low of 67.44 in late afternoon deals before ending at 67.41, revealing a sharp loss of 19 paise, or 0.28 per cent.
The rupee had appreciated by a whopping 98 paise in nine-day upsurge.
In worldwide trade, the Pound plummeted amid broad dollar's strength and also undermined by sluggish UK macro data.
The US dollar index was trading firmly higher at 100.56 in late afternoon session.
The RBI fixed the reference rate for the dollar at 67.3692 and for the euro at 72.0716.
In cross-currency trade, the rupee continued rally against the British pound to finish higher at 83.33 from 83.77 per pound and surged further against the euro to close at 71.93 from 72.15 earlier.
But, lost further ground against the Japanese Yen to close at 59.93 per 100 yens from 59.80 earlier.
Meanwhile, domestic equities retreated from four-month highs on modest profit-taking amid volatility as investors turned cautious ahead of the monetary policy committee meet tomorrow.
The benchmark Sensex dropped 104.12 points to end at 28,335.16, while broader Nifty shed 32.75 points to 8,768.30.
Foreign portfolio investors turned sellers after a bout of buying and offloaded shares worth a net Rs 403.52 crore yesterday.
In the forward market, premium for dollar displayed lacklustre movements in the absence of market-moving factors.
The benchmark six-month premium for July was quoted at 147-149 paise from 147.75-149.75 paise, while the far-forward January 2018 contract settled unchanged at 290-292 paise.
Crude prices traded little changed as lower production by OPEC and other exporters balanced growing evidence of a revival in US shale production and sluggish demand.
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
