Snapping its six-session winning run, the BSE benchmark Sensex plummeted 839 points on Monday as fresh India-China border tensions triggered a broad-based selloff in domestic equities.
Profit-booking at higher levels and weak macroeconomic data also fuelled the crash, traders said.
After rallying 543 points in the morning session and touching the 40,000-mark, the BSE Sensex surrendered all gains to close at 38,628.29, showing a loss of 839.02 points or 2.13 per cent.
Similarly, the NSE Nifty tanked 260.10 points or 2.23 per cent to end at 11,387.50.
In a fresh incident in eastern Ladakh, the Chinese army carried out "provocative military movements" to "unilaterally" change the status quo on the southern bank of Pangong Tso lake but the attempt was thwarted by the Indian troops, the Army said on Monday.
Sun Pharma was the top loser in the Sensex pack, plunging over 7 per cent, followed by SBI, Bajaj Finserv, Bajaj Finance, NTPC, ICICI Bank, Kotak Bank, M&M and Maruti.
Only ONGC and TCS ended on a positive note.
Indian markets opened trade on a positive note, but the sentiment failed to sustain in the afternoon session following reports of the border tensions with China, said Narendra Solanki, Head- Equity Research (Fundamental), Anand Rathi.
"Also the Sebi's new margining system starts from Tuesday which also likely impacted mid- and small-cap stocks where aggressive profit booking was seen," he added.
Meanwhile, market sentiment was also weakened after the release of core sector data.
The output of eight core infrastructure sectors contracted for the fifth consecutive month, dropping 9.6 per cent in July, mainly due to a decline in production of steel, refinery products and cement.
The production of eight core sectors had expanded by 2.6 per cent in July 2019, data released by the Commerce and Industry Ministry on Monday showed.
Investors are now awaiting gross domestic production (GDP) data, scheduled to be released later in the day.
Bourses in Shanghai, Hong Kong and Seoul ended in the red, while Tokyo settled with gains.
Stock exchanges in Europe were trading on a positive note in early deals.
Global oil benchmark Brent crude was trading 1.48 per cent higher at USD 46.49 per barrel.