Market analysts said that the future and option (F&O) expiry of the current month and sustained selling by Foreign Institutional Investors (FIIs) caused weakness in the markets.
Besides, nervousness ahead of the release of the GDP figures on August 31 also added to the pressure.
India's growth rate has witnessed sharp slowdown over the last few quarters and several projections have been revised downwards to signal that the economy faces increasing stress.
The benchmark Sensex flip-flopped between the intra-high of 37,381.80 and a low of 36,987.35, before it settled at 382.91 points, or 1.02 per cent lower. The broader Nifty declined by 97.80 points, or 0.89 per cent, to end the day at 10,948.30.
"Bank Nifty closed significantly lower because of consistent rise in India's 10-year bond yield. Technically, the market is in corrective mode and on the completion of the same we can expect one more upward pullback in the near term," said Kotak Securities Head (Technical Research) Shrikant Chouhan.
While heavy selling was witnessed in the banking and finance space, investors showed interest in the defensive sectors. SunPharma, Piramal Enterprises and Biocon Ltd surged in the range of 3 to 5 per cent, lifting the Nifty Pharma index 2.25 per cent.
Corporate fraud-hit CG Power sacked its Chairman Gautam Thapar on Thursday, giving a boost to its share price by 4.74 per cent.
Indiabulls Housing Finance stocks pared most early losses to end 0.49 per cent lower at Rs 455 per share, awaiting exclusion from the Nifty 50 index. Nestle India scrips, which will replace the mortgage lender on September 27, advanced by 1.62 per cent to Rs 12,720 per share.
Sugar stocks on the bourses also edged up after the Cabinet Committee on Economic Affairs (CCEA) on Wednesday approved an export subsidy for the 2019-20 sugar season to export 60 lakh tonne of sugar which would cost the exchequer Rs 6,268 crore.
( With inputs from IANS )