Mumbai: The rally in the previous session proved to be a temporary breather as the NSE Nifty Monday slumped to a 7-month low of 7,908 and the Sensex below 26,000, hit by talk of higher taxation after prime minister's remarks.
On Saturday, prime minister Narendra Modi had said market participants should contribute to nation-building in a "fair, efficient and transparent way" and promised more "sound and prudent policies and reform measures", which was seen by some as the government planning to impose long-term capital gains tax on profit made from investment in shares.
Though finance minister Arun Jaitley Sunday sought to clear the air saying the government has no such intention, investors were already a nervous lot.
This triggered selling, which saw the benchmark index fall for the eighth time in nine days to extend the last week's losing spell.
The 50-share Nifty after cracking below the 7,900-mark settled lower by 77.50 points, or 0.97 per cent, at 7,908.25. This is its lowest closing since May 24 this year when it came in at 7,748.85.
The BSE Sensex resumed lower and dropped further before ending at a fresh one-month low 25,807.10, a loss of 233.60 points, or 0.90 per cent. It had risen 61.10 points on Friday.
"With investors continuing to fret over demonetization, prime minister Modi's comments on higher taxes from capital markets ensured early sentiment was decidedly weak. Finance minister's reassurance dispelling rumors soothed markets, but with FIIs continuing their preference for cash, buying interest remained thin and sporadic," said Anand James, Chief Market Strategist, Geojit BNP Paribas Financial Services.
Short-covering ahead of December month expiry in the derivatives segment on Thursday and value-buying in select stocks helped the indices recoup losses to some extent, brokers said.
Foreign capital outflows continued, tracking other global markets.
Investors see equities to remain volatile in the near term as most foreign funds will be on year-end holidays amid absence of any major trigger.
Cipla took the biggest knock as it plunged by 4.94 per cent followed by Lupin 2.78 per cent, Tata Steel (2.64 per cent), ONGC and SBI (2.07 per cent).
From the gainers pack, HUL gained the most by rising 1.25 per cent, Bharti Airtel 0.25 per cent and TCS 0.17 per cent.
Meanwhile, foreign funds sold shares worth Rs 1,462.65 crore last Friday, as per the provisional data.
Major Asian indices were down as investors cashed in on a recent global rally fueled by expectations from the incoming administration of US President-elect Donald Trump.
Japan's Nikkei shed 0.16 per cent but Shanghai Composite rose 0.40 per cent. Hong Kong, Singapore and Kuala Lumpur markets remained closed Monday for a public holiday.
Europe was mixed in afternoon trade as indices in London and Paris moved up by 0.06 per cent and 0.10 per cent. Frankfurt was down 0.05 per cent.
Back home, the mid-cap index fell 2.17 per cent while the small-cap lost 2.10 per cent.
Out of the 30-share Sensex pack, 25 ended lower.
Among BSE sectoral indices, realty fell by 3.61 per cent, followed by metal 2.85 per cent, healthcare (2.58 per cent), PSU (2.05 per cent) and power (1.79 per cent).
The market breadth remained negative as 2,020 stocks ended lower, 577 advanced while 178 remained unchanged.
The total turnover on BSE shrank to Rs 1,856.51 crore, from Rs 2,402.87 crore registered during the previous trading session.
(With inputs from agencies)