Falling rupee added to the woes of the sectors that depend on imports.
The rupee fell to 28-month low at 49.90 per dollar and became the worst performer among Asias 10 most-traded currencies, brokers said.
Sensex, which suffered biggest loss of 704 points in over 26 months yesterday, fell another 199.09, or 1.22 per cent to 16,162.06.
In a volatile trade, the gauge touched an intra-day high of 16,368.41 and a low of 16,052.47 as investors rushed to shift from one sector to another to protect their money.
Sensex has tumbled 21 per cent this year on a host of negatives such as high inflation, rising interest rates, Europes debt crisis and slowing US economic growth.
Similarly, the NSE index Nifty lost 55.90 points to 4,867.75 with stocks in metal, capital goods and auto sector falling sharply.
A weakening trend in the Asian region and continued slide in European markets impacted the sentiment in Mumbai.
In the US, Dow Jones suffered biggest two-day fall since December 2008.
The global stocks pulled down the MSCI All Country World Index of 45 nations to more than two years low.
The metals sector index was worst performer, down 2.28 per cent as copper prices dropped to on