A brief crash in Nifty futures, probably due to erroneous trades also weighed on domestic sentiments, traders said. (Read)
Anil Manghnani of Modern Shares & Stock Brokers told NDTV that if the Nifty slips below 8,146 he will go short. The Nifty can fall to 7,600-7,700 in this case, he added.
Domestic stocks came under pressure tracking Japan's Nikkei benchmark, which closed 3 per cent or 525 points lower. Markets in Hong Kong, South Korea and Taiwan fell 1-2 per cent.
Investors rushed to sell risk assets, such as stocks, amid the continued slide in oil prices, which plunged as much as 6 per cent on Monday. The slump in crude prices has raised doubts about global economic growth.
"Falls in oil prices are going beyond many people's expectations. This will put pressure on the earnings of US energy firms," said Hirokazu Kabeya, senior strategist at Daiwa Securities.
Although crude futures rebounded in Asia, concerns that current low prices would squeeze many energy producers hurt any assets with close links to energy.
Adding to the gloom was increasing speculation that Greece might be kicked out of the eurozone if a left-wing party that has vowed to end austerity measures and erase a big portion of its debt wins in Jan. 25 elections as widely expected. (Read the full story here)
India benefits from low oil prices as the country imports nearly 80 per cent of its oil needs. But, the global selloff may force foreign investors to book profits in Indian shares and repatriate funds, analysts say. Indian stock markets finished 2014 with 30 per cent gains as FIIs pumped in $42 billion in equities and debt.
Energy stocks were the biggest underperformers in trade today with stocks such as ONGC and Cairn India falling over 3 per cent. Index heavyweight Reliance Industries traded 2.75 per cent lower.
Recent gainers also witnessed profit taking. The Bank Nifty fell 2 per cent.
47 of the 50 stocks in Nifty traded in the red. Tata Motors, which had gained more than 6 per cent in the last four sessions, declined 3.5 per cent.
FMCG major HUL, refiner BPCL and Asian Paints were the only Nifty gainers in the noon trade.
As of 12.05 p.m., the Sensex traded 575 points lower at 27,267, while the Nifty was down 167 points at 8,211.
(With inputs from Reuters)