The S&P BSE Sensex index fell as much as 260.05 points to 37,191.79 in early trade and the broader NSE Nifty benchmark moved to 10,965.50, down 80.6 points from the previous close.
Weakness across sectors - led by financial, metal and energy shares - pulled the markets lower. Caution prevailed ahead of the expiry of monthly derivatives contracts. Analysts awaited macroeconomic data due on Friday for cues.
At 9:27 am, the Sensex traded 242.48 points - or 0.65 per cent - lower at 37,209.36 while the Nifty was down 73.75 points - or 0.67 per cent - at 10,972.35.
Top percentage laggards on the 50-scrip index at the time were Indiabulls Housing Finance, Yes Bank, JSW Steel, Tata Motors, Grasim and TAta Steel, trading between 1.17 per cent and 6.56 per cent lower.
HDFC, ICICI Bank, Reliance Industries and HDFC Bank were the top drags on the Sensex.
On Wednesday, the Cabinet gave nod to further liberalization of foreign direct investment (FDI) rules in four sectors, in an effort to spur economic growth. It approved FDI in digital media up to stakes of 26 per cent, and allowed 100 per cent FDI in coal mining, associated infrastructure and sales of fuel.
The Cabinet also allowed 100 per cent foreign direct investment in contract manufacturing and eased sourcing norms for single-brand retailers.
The derivatives contracts (futures & options) for the month of August will expire at the end of the session.
The government will release GDP or gross domestic product data for the quarter ended June 30 on Friday evening. According to a poll by news agency Reuters, the economy was expected to have grown 5.7 per cent in June quarter - its slowest pace in more than five years.
Equities in other Asian markets fell as global recession worries from intensifying US-China trade frictions. MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.38 per cent and Japan's Nikkei shed 0.44 per cent. Singapore shares hit eight-month lows.
The Sensex and Nifty had finished 189.43 points - or 0.50 per cent - and 59.25 points - or 0.53 per cent - on Wednesday, after climbing 3.20 per cent and 3.39 per cent respectively in the past three sessions.