MUMBAI The BSE Sensex fell the most in more than three-and-a-half months to close 2.8 percent lower on Wednesday, its lowest close since late February, as global stocks tumbled after Germany's move to sharpen financial regulation raised doubts on global recovery, triggering a flight to safety.
Foreign funds have already pulled out around $770 million from Indian equities so far in 2010, and there were concerns the pressure could continue until the euro zone situation improves.
Top private lender ICICI Bank dropped as much as nearly 8 percent on concerns its proposed deal to buy small private sector Bank of Rajasthan was expensive.
The 30-share BSE index closed 2.77 percent or 467.27 points lower to finish at 16,408.49 points, its lowest close since Feb. 25. Twenty-seven of its components closed in the red.
"Our market may be impacted in the short run due to the woes in Europe," said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services.
"But from a long-term perspective, there are buying opportunities as our fundamentals are in place. The India story is intact," said Rawal who manages $1 billion of wealth.
Rawal has a buy recommendation on banking and infrastructure stocks for his clients.
Germany, in an attack on the financial speculation on which it blames much of the euro zone's debt crisis, on Tuesday banned naked short sales of euro-denominated government bonds, sovereign credit default swaps on those bonds and of shares in Germany's 10 top financial institutions until March 31, 2011.
European stocks were trading sharply lower with the pan-European FTSEurofirst 300 index of top shares declining 2.2 percent by 1015 GMT.
World stocks, as measured by the MSCI All-Country index, were down 1.4 percent while the more volatile emerging markets index fell 2.6 percent.
India's benchmark index has already shed 6.6 percent this month as the euro zone debt woes triggered foreign fund outflows, bringing down net inflows to $5.7 billion so far this year.
In 2009, record $17.5 billion purchases by foreign funds drove the index up 81 percent. It is down 6 percent so far in 2010.
"As the market weakens with further orderly falls, in commodity prices in particular, investors should accumulate capital goods, private sector banks and select consumer discretionary stocks," Credit Suisse said in an India market strategy note.
ICICI Bank logged its biggest single-day fall since July 2009 and closed 7.2 percent lower at 825 rupees, its lowest close in three months after it agreed to buy Bank of Rajasthan, the shares of which hit the 20-percent upper limit at 119.40 rupees.
Based on the all-stock deal's swap rate and Tuesday's closing prices, ICICI would pay 188.42 rupees per share, a premium of 89 percent to the small lender's Tuesday close, valuing the business at $668 million.
"At a swap ratio of 1:4.7, the acquisition is expensive, at 5.0 times book or a $680 million cost to acquire 466 branches," Credit Suisse analysts Ashish Gupta and Deepak Ramineedi said in a note.
"This is surprisingly high, as it had organically added 400 plus branches last year at a fraction of this cost."
Energy giant Reliance Industries, which has the highest weight on the Sensex, closed 2.2 percent lower at 998.30 rupees.
Metal makers declined as industrial metal prices declined and outlook remained uncertain.
Non-ferrous metals producer Sterlite Industries and aluminium maker Hindalco dropped 7.3 percent and 3.9 percent respectively.
Tata Steel, world's eighth-largest steelmaker, closed 3.6 percent lower.
In the broader market, losers were more than thrice the number of gainers in a relatively lower volume of 381 million shares.
The 50-share NSE index closed 2.9 percent lower at 4,919.65 points, its lowest close since Feb. 25.
STOCKS THAT MOVED
* Piramal Healthcare reversed early gains and closed 3.2 percent lower at 524.95 rupees after the drugmaker said its founder has no proposal to sell any stake in the company.
* Textile firm Mandhana Industries listed at 134 rupees on the BSE, 3.07 percent above its issue price of 130 rupees. It closed at 133.65 rupees.
* Oil explorer Cairn India, a unit of Cairn Energy, shed 3.9 percent to 278.75 rupees as crude prices fell.
Oil fell to $68 per barrel on Wednesday, with U.S. crude recording its lowest level for seven months.
MAIN TOP 3 BY VOLUME
* Reliance Natural Resources on 12.6 million shares
* Mandhana Industries on 10.9 million shares
* Tarapur Transformers on 9.2 million shares
(Editing by Malini Menon)
(For more business news on Reuters Money visit www.reutersmoney.in)