Global markets traded lower after US reported strong job data, which faded hopes of an aggressive rate cut by the Federal Reserve.
"Equity markets were expecting some kind of fiscal stimulus from the budget but there has been a big disappointment," said Rusmik Oza, Head of Research, Kotak Securities.
Oza added that housing was the only segment to get some kind of a stimulus and that the budget had been taken positively by the bond market due to curtailment of the Fiscal Deficit.
The 30-scrip Sensex closed 792.82 points or 2.01 per cent lower at 38,720.57 and the broader Nifty50 declined by 252.55 points or 2.14 per cent to 11,558.60.
Investor sentiment also took a beating as the second-largest state bank, Punjab National Bank's (PNB) on Saturday admitted that it had been defrauded of Rs 3,805.15 crore by Bhushan Power and Steel Ltd (BPSL).
This is the second time in 12 months that the state-run bank has been duped. Last year, jeweller Nirav Modi and his uncle Mehul Choksi had defrauded it of Rs 14,000 crore in one of the biggest bank scams in the country.
PNB declined by 11.25 per cent to Rs 76.30 apiece dragging the PSU Bank index, which closed 5.90 per cent lower.
Heavy selling was seen in PSU banks such as Bank of India, Union Bank of India and Canara Bank, which were trading over 8 to 10 per cent lower.
Canara Bank, Syndicate Bank, Indian Bank and Bank of Baroda declined in the range of 5 to 8 per cent.
Auto companies were also major contributors to the fall. Hero MotoCorp Limited and Maruti Suzuki India declined over 4 per cent, the most among the 15 constituent companies on the NSE Auto index.
( With inputs from IANS )