The S&P BSE Sensex shed 554 points to end below its crucial psychological level of 25,000 in trade on Thursday, while broader CNX Nifty fell below its key support level of 7,600.
The headline indices plunged to four-month lows after China opted to keep guiding the yuan sharply lower, deepening concerns about the economy and the potential for competitive devaluations by other countries.
Shanghai shares tanked more than 7 per cent and trading was halted for the rest of the day as the fall triggered a circuit breaker, despite recent supportive measures announced by Chinese authorities.
The 30-share index closed at 24,851 points, down 554.50 points, while broad-based 50-share index was quoting 7,568 points, down 172.70 points.
Market breadth turned completely negative with all of the 30 Sensex components closing in the red.
The concerns about markets in Asia's second-largest economy sent India's VIX, which measures the local market's expectation of volatility in the near term, higher by more than 14 per cent to its highest level since November 16.
Still, analysts felt Indian shares would ultimately withstand the volatility triggered by China, given the sturdier economic fundamentals.
"I think the market is over-reacting. The fundamentals of the market and the economy are far better than what one could hope for," said Deven Choksey, managing director at KR Choksey Securities.
Mid-cap stocks fell the most with the BSE mid-cap sub index declining as much as 2.61 per cent.
Among other stocks that fell, Tata Motors dropped 6.15 per cent on worries a slowdown in China would hit Jaguar sales.
Asian markets felt the heat on China rout with Japan's Nikkei losing 2.33 per cent, while Hong Kong's Hang Seng index settled over 3 per cent down. South Korean Kospi also lost over 1 per cent.
The US Dow futures were trading over 300 points down pointing to a sharply lower open on Thursday. Overnight, US stocks plunged more than 1 per cent to a three-month low as investors adopted risk-off mode on spate of global and domestic cues.
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A lowdown on markets today
Closing
Sensex at 24,851, down 554 points
Nifty at 7,568, down 172.70 points
01:15 pm
Sensex at 24,944.85, down 461.48 points
Nifty at 7,595.40, down 145.60 points
12:06 pm
Sensex at 24,952.03, down 454.30 points
Nifty at 7,597.90, down 143.10 points
11:00 am
Sensex at 25,057.43, down 348.90 points
Nifty at 7,631.30, down 109.70 points
9:24 am
Sensex at 25,100.39, down 305.94 points
Nifty at 7,645.95, down 95.05 points