The Reserve Bank of India Wednesday left the repo rate unchanged at 6.5 per cent while maintaining the stance of 'calibrated tightening' of policy.
In a bid to boost lending, the RBI lowered the reserves lenders are compulsorily required to hold in the form of government securities.
However, it failed to enthuse the markets, which had opened weak and dropped further after RBI's policy announcement.
Weakness in the rupee against the US dollar also weighed on sentiment, traders said. The local unit fell 11 paise to 70.60 against the US dollar intra-day.
"Nifty performed in line with the weak international cues and shut the shop with losses... Nifty Midcap and Small-cap indices fell even sharply by 1.5 per cent and 1.8 per cent respectively.
"Key US indices tumbled more than 3 per cent on Tuesday on the combined onslaught of inversion in bond yields and fresh jitters on trade," said VK Sharma, Head PCG and Capital Markets Group, HDFC Securities.
Sun Pharma, under the regulatory lens for alleged corporate governance lapses, was the biggest loser in the Sensex pack, declining 6.59 per cent.
Other laggards included Tata Steel, Vedanta, Tata Motors, M&M, Coal India and ITC, falling up to 4.27 per cent.
Top gainers included HUL, HDFC, HDFC Bank, Wipro, Reliance Industries and Adani Ports, spurting up to 2.07 per cent.
US President Donald Trump and his Chinese counterpart Xi Jinping had agreed to a truce at the G20 meet.
Trump, however, muddied the waters by suggesting the possibility of an extension of trade talks.
"The negotiations with China have already started. Unless extended, they will end 90 days" from Saturday, Trump tweeted.
On a net basis, foreign portfolio investors (FPIs) sold shares worth Rs 55.89 crore Tuesday, while domestic institutional investors (DIIs) were net sellers to the tune of Rs 521.38 crore, provisional data available with BSE showed.
Brent crude, the international benchmark, was trading 0.53 per cent lower at USD 61.75 per barrel.
In Europe, Frankfurt's DAX shed 0.91 per cent and Paris' CAC 40 fell 0.97 per cent. London's FTSE too slipped 0.95 per cent.
(With inputs from agencies.)