The Sensex and the Nifty fell around 0.9 percent, resuming trade after a shortened Diwali session on Tuesday.
The fall tracked lower Asian shares at the prospect of drawn-out negotiations over the looming U.S. "fiscal cliff" and rising tensions in the Middle East after Israel launched an offensive against Palestinian militants in Gaza.
Data on Wednesday showed India's headline inflation in October rose 7.45 percent, unexpectedly eased to its slowest pace in eight months, but still high enough to be a headache for policymakers struggling to balance the need for growth with taming prices.
Software services exporters with significant business in the United States were among the leading decliners: Infosys Ltd was down 2.2 percent, Tata Consultancy Services Ltd traded 1.7 percent lower.
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