The Sensex plunged 463 points or 1.23 per cent to close at 37,018 and the NSE Nifty 50 Index dropped 1.24 per cent or 105 points to shut shop at 10,980.

"Global markets were expecting a more dovish Fed and are disappointed by "mid cycle adjustment" this has led to a rise in the dollar. This is not good for emerging market equities like India," Vivek Ranjan Misra, head of fundamental research at Karvy Stock Broking said.

"For Indian equities, this is on top of the headwinds it has faced recently, like FII selling on account of tax proposals. There are other reasons as well, firstly the weakness in economy has not abated, as evident by the core sector data and auto sales. We continue to believe that the economy should stabilize in second half of current financial year and the markets should be in better shape in a couple of quarters," Mr Mishra added.

Vedanta, JSW Steel, State Bank of India, Zee Entertainment, Tata Motors, Hindalco, Bharti Airtel, Indiabulls Housing Finance and Tata Steel were among the top losers in the Nifty 50 basket of shares falling between 3 and 5 per cent each.

On the flipside, Maruti Suzuki, Wipro, Bharti Infratel, Reliance Industries and Power Grid were among the notable gainers.

All sector gauges, barring the Auto Index, compiled by National Stock Exchange ended lower led by the Nifty Metal Index's 3.13 per cent fall. Nifty Media, PSU Bank, Private Bank, Pharma, Information Technology, Financial Services and Bank sector gauges also dropped between 1.4 and 3.1 per cent each.

Mid- and small-cap shares also faced selling pressure as the Nifty Midcap 100 Index and Nifty Smallcap 100 Indexes fell around 1 per cent each.

Foreign investors have been selling shares in Indian markets and in the month of July foreign portfolio investors sold shares worth Rs 12,418.73 crore, data compiled by NSDL showed.

In July the S&P BSE Sensex dropped 4.86 per cent and the Nifty 50 Index plunged 5.69 per cent making it the worst month for Sensex since October 2018 and worst for Nifty since September 2018 when defaults at IL&FS surfaced.