Concerns foreign funds could pull out more from India, which has been one of the world's worst performing markets this year, also weighed.
Traders said investor sentiment was dented by comments from the German finance minister against a quick-fix to Europe's debt problems, slowing growth in China and a warning on France's sovereign credit rating.
"There is a significant impact from the way things are unfolding globally. The worries that the worst may not be over is certainly affecting sentiment," said Kishore P Ostwal, managing director, CNI Research said.
Software services companies that get most of their revenue from exports led the fall.
Tata Consultancy ( TCS), India's biggest software services exporter, fell 7.7 percent to 1,033.55 rupees, a day after the company reported lower-than-expected quarterly earnings and said the outlook for pricing was tough.
It was the steepest one-day slide since May 19, 2009 when it had slumped 10 percent.
UBS downgraded the stock to 'sell' from 'neutral' while maintaining its target price of 1,000 rupees on back of concerns about the spending outlook for the current fiscal year, especially in financial services.
Rivals Infosys and Wipro shed 1.6 and 3 percent respectively.
The main 30-share BSE index ended down 1.63 percent at 16,748.29, its biggest drop since Oct. 4. Twenty-six of its components declined.
The benchmark, which had risen 5.2 percent last week in a bounce back, is down about 17 percent so far this year.
Ostwal said investors were also wary after monthly derivatives contracts expiry was brought forward by two days to Oct. 25 due to holidays.
Shares in HCL Technologies , India's fourth largest software services firm, fell 8.75 percent as investors shrugged off a 50 percent jump quarterly profit and focused on a cloudy outlook for the sector amid slowing global growth.
India's showpiece $76 billion industry gets more than 90 percent of its revenue from providing technology services to overseas clients and counts the United States and Europe as its biggest markets.
Banking shares fell on worries over rising interest rates and slowing growth in Asia's third-largest economy, which have been eroding asset quality.
State Bank of India dropped 1.3 percent, while rival ICICI Bank fell 2.5 percent.
Expectations the central bank will raise rates next Tuesday when it reviews policy have gathered momentum after September inflation remained high.
Leading motorcycle maker Hero MotoCorp ended down 0.35 percent ahead of its results. A Reuters poll estimated quarterly profit to rise 11 percent.
The 50-share NSE index shed 1.58 percent to 5,037.50. In the broader market, there were 2.8 losers for every gainer on total volume of about 450 million shares.
World stocks as measured by MSCI fell nearly 1 percent, while the emerging equities index was down 2.3 percent.
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