The benchmark Sensex fell by 769.88 points or 2.06 per cent at 36,562.91 before falling as much as 36,466.01. The broader Nifty declined by 225.35 points or 2.04 per cent lower at 10,797.90.
Despite a series of measures announced by Finance Minister Nirmala Sitharaman to revive private investment and the transfer of the RBI's excess reserve to the government, investor confidence remained subdued.
India 'VIX' or the volatility index the market's expectation of volatility over the near term closed at 18.60, after it surged nearly 12 per cent.
"The sharp fall in the Q1 GDP growth to 5 per cent and the weak core sector growth are the key factors that have caused a fall in the markets as it opened after a long weekend," said Joseph Thomas, Head of Research-Emkay Wealth Management.
Weak domestic consumption, especially rural consumption, has resulted mainly from low employment levels and non-availability of finance, which are issues that call for immediate measures to salvage the situation, he added.
Nifty PSU Bank index fell the most on Tuesday - by nearly 5 per cent. It was followed by heavy selling in metal stocks, with the index declining by over 3 per cent.
"The consolidation of PSU banks is a step in right direction.. however, they may take more time before earning benefits from synergy," said Vinod Nair, Head of Research, Geojit Financial Services.
Investors reacted to the data released on Friday which showed that India grew at its weakest pace between April and June since 2013. Besides, poor monthly auto sales data and weak core sector data added to the further sell-off in the equity markets.
Except for HCL Tech and Tech Mahindra, all the 30 Sensex scrips finished lower. ICICI Bank, Tata Motors (DVR), Tata Steel, Vedanta and HDFC comprised the top index losers, declining in the range of 3 to 5 per cent.
( With inputs from IANS )