The benchmark 30-share Sensex index was down 3.37 percent or 575.22 points at 16,489.93 at the Bombay Stock Exchange in afternoon trade.

The Indian currency also fell to a new two-year-low of 49.01 rupees to the the dollar -- a level last seen in September 2009 -- as demand for the safe-haven greenback rose.

The fall in the rupee will fuel India's inflationary woes, making imported goods such as foreign crude oil, on which the country is reliant, more costly.

India's annual inflation is currently sitting near double digits.

"Global concerns and a weak rupee are reducing risk-appetite," said Hemen Kapadia, chief executive with investment advisory firm Chart Pundit.

The Reserve Bank of India raised rates for the 12th time in 18 months last week to combat inflation, despite signs of slowing growth.