Markets ended near the day's high after a volatile session of trade.
The Sensex dropped to a low of 16,808, after the rupee slumped to an all-time low against the dollar as foreign investors shunned risky assets and month-end demand for the greenback from Indian refiners for oil imports.
However, it managed to recover and finally ended at 16,973 - down 60 points. Nifty ended down 19 points at 5,146.
In Asia, markets dipped on worries of slowdown in the world economy.
Ratings downgrade of several banks led to investors shying from riskier assets.
Japan's Nikkei average fell 0.3% to 8,798 as data showing U.S. manufacturing grew at its slowest pace in 11 months in June added to concerns about weaker growth in Europe and China, but the index was still headed for best weekly gain in four months.
Kospi tumbled 2.2% to 1,847.
The rupee plunged by 57 paise to a new low of Rs 56.87 against the dollar in early trade today on increased capital outflows and rising demand from importers for the American currency.
Besides, strengthening of dollar against the euro put pressure on the local unit.
BSE metal index dropped 1.5% to 10,345. Capital goods, IT and FMCG indices also showed weakness. BSE realty and auto indices bucked the trend.
BSE auto index advanced 0.1% to 9,338 following the Calcutta High Court ruling on Singur Land case.
Reliance continued to be the top dragger among Sensex stocks - down 1% at Rs 711. HDFC and Infosys were among the key losers.
Metal shares - Hindalco and Tata Steel declined 3% each to Rs 117 and Rs 419, respectively following the sell-off in global commodities.
Meanwhile, ONGC and Cipla added 1.4% each. ONGC extended its 4% rise in the past three days after the state-owned oil exploration firm signed an agreement with China's largest oil firm, China National Petroleum Corp (CNPC) to jointly explore for oil and gas worldwide.
Maruti Suzuki advanced 1% to Rs 1,101. Among other gainers were TCS and Hero MotoCorp.
The Calcutta High Court today struck down the Singur Land Rehabilitation and Development Act, 2011, provising relief to Tata Motors.
A division bench of the High Court set aside an earlier single bench order that had upheld the Act and held the piece of legislation as unconstitutional and void as President's assent had not been taken. Tata Motors traded flat at Rs 247.
Shares of cement makers were under pressure in opening deals after the competition watchdog, Competition Commission of India, (CCI) imposed a hefty penalty of about Rs 6,300 crore on eleven leading cement companies for price cartelisation.
ACC, Ambuja Cements, Ultratech Cements, India Cements, Madras Cements and Century Textiles slumped 1-4% each on the Bombay Stock Exchange.
"Cement stocks moved well before CCI order. Now some profit booking can be observed after the CCI order. ACC has strong hurdle at Rs 1265, Ambuja hurdle is seen at Rs 172," said Chandan Taparia, Derivative Analyst, Anand Rathi Financial Services.
Among, individual stocks, Welspun Corp moved higher by 1% at Rs 122 after the company said it has won pipes orders worth of Rs 1,738 crore from international and domestic markets.
Cox and Kings rallied 4% to Rs 128 on reports that the company is in talks with some private equity (PE) funds to sell a minority stake in its UK subsidiary.
BSE market breadth was negative. Out of 2,884 stocks traded, 1,392 shares declined while 1,363 shares advanced.
