Union Home Minister Amit Shah earlier in the day proposed to revoke Article 370 of the Constitution which gives special status to Jammu and Kashmir and said the state will be split into two Union Territories: Jammu and Kashmir with an Assembly and Ladakh without one.
Though the markets did not repond to the announcement with any major volatility, the Sensex closed 418.38 points lower at 36,699.84, after trading heavy losses throughout the day. The broader Nifty fell by 134.75 points or 1.23 per cent to 10,862.60.
Market analysts said the Kashmir development was an add-on to the US-China trade tension, which was the main cause of the Monday's market fall. Global markets came under further stress after China vowed to respond to the US tariffs announced last week.
The Indian rupee too registered a three-month low following the slide in Yaun, which declined below 7 to a dollar for the first time since 2008.
"Multiple headwinds led to the day's market volatility. Concerns of a political crisis brewing in J&K and no further cues on the exclusion of surcharge for Foreign Portfolio Investors (FPI) added to the market volatility," said Vinod Nair, Head of Research, Geojit Financial Services.
"Selling was broad-based despite late recovery witnessed in auto and banks, and IT held on to gains due to a weakening rupee. Consolidation may extend given the headwinds in global trade negotiations and the risk aversion strategy adopted by the FPIs," Nair added.
The investor sentiment is already weak owing to an exodus of foreign funds on account of weak corporate earning results and the controversial super-rich tax proposed in the Budget last month.
( With inputs from IANS )