The Sensex ended 162 points lower at 34,184 while Nifty settled at 10,492, down 61 points. The Nifty Bank index fell over 1 per cent.
MSCI's broadest index of Asia-Pacific shares outside Japan slipped 1.06 per cent.
The weak spell in domestic markets lingered on apprehensions over state-run banks after the finance ministry set a 15-day deadline for banks to take pre-emptive action on operational and technical risks, following a $2 billon fraud at Punjab National Bank.
The Department of Financial Services also ordered state-run lenders to comb through their bad loans of more than 50 crore for potential fraud.
"In the short-term, these finance ministry directives could create panic in the market," said Sumit Pokharna, deputy vice president, Kotak Securities.
"There are many loans which are more than 50 crore and that could be a problem now, but it is definitely a good step in the long run."
Investors are also looking out for key domestic economic data this week including Oct-Dec gross domestic product (GDP) due later in the day. A Reuters poll forecast GDP expansion at 6.9 per cent, the fastest in 2017.
However, the information technology stocks eked out some gains