Indian stocks fell nearly three percent at the opening of trade on Tuesday, tracking plunging Asian markets after sharp losses on Wall Street overnight.
The benchmark 30-share Sensex on the Bombay Stock Exchange lost 505.89 points or 2.98 percent to 16,484.29 within minutes of the opening.
The index then retraced on bargain hunting to 16,682.18 but was still down nearly 2.0 percent.
Software exporters with large exposure to the US market, telecoms, metal and property stocks were worst hit, as global markets reacted to last week's US credit downgrade.
Fund managers and dealers were advising clients to sell off equities as global markets tumble further, even though India's government and the central bank have tried to allay investor concerns.
"There is panic setting in. We expect further falls. We are advising clients to sell off," said Jagannadham Thunuguntla, head of research with New Delhi-based SMC Global Securities.
Kim Eng Securities' analyst Jigar Shah said he did not know how far the share index might drop.
"The fear is about growth. We expect a certain amount of dilution in stock valuations," he added.
India's largest software outsourcer Tata Consultancy Services (TCS) lost 4.46 percent in early trade while rival Wipro shed 3.95 percent. Infosys dropped just over 3.0 percent.
Leading vehicle maker Tata Motors was down for a second straight day, falling 4.15 percent on concerns of slowing auto sales, as interest rates and input costs continue to rise.
Global fund managers and policy makers said they will scrutinise statements from the US Federal Reserve later on Tuesday to review policies, amid doubts about what it can do to head off a double-dip recession.
India's government on Monday said the country was in a better position to deal with global uncertainty than most other nations, while the central Reserve Bank of India said the impact of the US downgrade on India would be "limited".
India's economy fared better than most Western countries during the last global financial crisis, posting 6.8 percent annual growth in 2008-09, as it remains largely insulated, led by local demand for most of its goods and services.