Software services companies such as Infosys and Tata Consultancy Services, which get most of their revenue from exports, were among the major losers.

Banks also fell on expectation higher borrowing costs would dent demand for loans.

"Global cues are definitely weighing on the market sentiment and retail investors are completely on the sideline because of the uncertainty in the global environment," said Kishor Ostwal, chairman of brokerage CNI Research.

The main 30-share BSE index shed 1 percent to 18,131.10 by 10:32 a.m. (0502 GMT), with all but four of its components declining.

The 50-share NSE index shed 1.01 percent to 5,461.00. In the broader NSE market, there were more than three losers for every gainer on total volume of about 134 million shares.

"The market is likely to get into a consolidation phase in the short term, and the trigger for this could come from the government announcing some big policy decisions to boost investment and growth in this session of parliament," Ostwal said.

A five-week parliament session started on Monday and analysts expect the government to introduce reforms bills including allowing foreign investment in supermarkets, freeing fuel prices, slashing subsidies and reforming loss making state-run utilities.

India's economy showed further signs of slowdown on Monday, when a survey showed July factory expansion the weakest in 20 months, while a top government panel cut its growth forecasts for the fiscal year ending in March to 8.2 percent.

Private-sector economists expect a sharper slowdown after the central bank raised interest rates by a hefty 50 basis points last week to control high inflation. It was the 11th increase since March last year.

Morgan Stanley became the latest bank to cut its outlook for Asia's third-largest economy, predicting 2011/12 growth at 7.2 percent from 7.7 percent earlier.

Top lender State Bank of India was down 1.2 percent at 2,316.10 rupees, while ICICI Bank fell 1.4 percent to 1,031.10 rupees on concerns rising rates would curb credit growth and hit profitability.

The banking sector index was down 1.3 percent.

Shares in software firms fell after sluggish manufacturing data from the United States, their largest market. Second-biggest software exporter Infosys fell 1.9 percent to 2,763 rupees, while larger rival Tata Consultancy was down 0.7 percent at 1,127rupees.

The sector index dropped 1.4 percent.

Elsewhere, the MSCI's measure of Asian markets other than Japan was down 1.58 percent and Japan's Nikkei fell 1.42 percent.

An 11th hour deal to raise the US debt ceiling cleared its biggest hurdle in the House of Representatives, staving off the prospect of a calamitous default but failing to allay fears Washington could still lose its coveted triple-A credit rating.

STOCKS ON THE MOVE

Bajaj Auto rose as much as 1.2 percent to 1,504.85 rupees after India's No.2 motorcycle maker and the top producer of motorised 3-wheeled rickshaws posted a 14 percent rise in July sales.

ARSS Infrastructure Projects was up 0.5 percent at 392.30 rupees after the company said it had won order worth 746 million rupees.

Copyright Reuters, 2011