At 3.06 p.m., the Sensex was down 819.77 points or 2.07 per cent to 38,693.62 while the braoder Nifty shed 271.40 points or 2.30 per cent.
A sell-off in the global markets was triggered as the US reported strong job data, which faded hopes of an aggressive rate cut by the Federal Reserve.
Besides, Punjab National Bank's (PNB) admission on Saturday that it had been defrauded of Rs 3,805.15 crore by Bhushan Power & Steel Ltd (BPSL) dragged the PSU Bank index causing it to fall over 5 per cent.
Within a span of 12 months this is the second time that the state-run bank has been defrauded. Last year jeweller Nirav Modi and his uncle Mehul Choksi to the tune of Rs 14,000 crore, in one of the biggest bank scam in the country.
During the late afternoon trade, PNB was trading 10.70 per cent lower or Rs 10.70 apiece to Rs 73.
Heavy selling was seen in PSU banks such as Bank of India, Union Bank of India and Canara Bank, which were trading over 6 to 10 per cent lower. Oriental Bank, Syndicate Bank, Indian Bank and Bank of Baroda declined in the range of 4 to 6 per cent.
Auto companies were also major contributors to the fall. Hero MotoCorp Limited and Maruti Suzuki India declined over 5 per cent, the most among the 15 constituent companies on the NSE Auto index.
( With inputs from IANS )