Besides, weak Chinese economic data and a lack of progress on trade tariff issue between the US and China further hit investor sentiments. Adding to the woes, the rupee today plummeted by 52 paise in intra-day to trade at 68.03.
The BSE Sensex opened on a positive note today and gathered further strength as the day progressed after poll trends showed the Narendra Modi's BJP leading comfortably in counting of votes for Karnataka poll results.
The 30-share Sensex surged over 436 points in early trade and the NSE Nifty soared nearly 128 points before making a U-turn.
"Market has a good start led by positive impression of central ruling government in the Karnataka election, but lost its aura as lack of clear majority emerged by the end of the day. Whatsoever be the final outcome, this will give more depth to the market as concern over the performance of BJP in the next general election of 2019 will reduce," Vinod Nair, Head of Research, Geojit Financial Services Ltd, said.
At the same time, the market will try to focus back on macro and micro economic parameters which have been unpleasant in the recent time, he said.
As BJP's lead narrowed in counting of votes in Karnataka, the Congress went on to offer its support to the JD(S) to form the government. In the morning, the early trends indicated the BJP might be able to touch the magic number to form the government on its own.
After the Congress' support, Janata Dal (Secular) leader H D Kumaraswamy today wrote to Karnataka Governor Vajubhai Vala informing him about his decision to accept the offer to form the government.
As per latest poll trends, the BJP had won 87 seats, was leading on 17 -- making a total of 104 seats. While the Congress had won 65 seats and was ahead on 13, a total count of 78 seats.
JD(S) had won 33 seats and was leading on 4.
Also Read : Committed to fostering innovation in India: Microsoft
Investors who had created huge position after early trends on hopes of BJP win trimmed their bets after the saffron party seat prospects shrank.
The 30-share BSE index hit a high of 35,993.53 in morning trade. Later, it met with profit-booking at higher levels and slipped in the negative zone to hit a low of 35,497.92, before settling 12.77 points, or 0.04 per cent to 35,543.94. The gauge had gained 310.44 in the previous two sessions.
The 50-share Nifty reclaimed the key 10,900-mark to touch a high of 10,929.20 in initial trade and fell back by 4.75 points, or 0.04 per cent, to end at 10,801.85. It touch a low of 10,781.40.
Meanwhile, foreign portfolio investors (FPIs) bought shares worth a net Rs 717.99 crore while domestic institutional investors (DIIs) bought shares worth Rs 687.23 crore yesterday, as per provisional data.
Sensex components which finished in the red were Tata Motors 4.29 per cent, Coal India 2.11 per cent, SBI 1.87 per cent, Sun Pharma 1.22 per cent, ITC 0.93 per cent, NTPC 0.79 per cent, ICICI Bank 0.63 per cent, RIL 0.56 per cent, Bharti Airtel 0.55 per cent, Axis Bank 0.41 per cent, Wipro 0.41 per cent, Dr Reddy's 0.37 per cent, L&T 0.31 per cent, HDFC LTD 0.25 per cent, Bajaj Auto 0.24 per cent and M&M 0.17 per cent.
On the other hand, Tata Steel emerged as the top gainer by surging 2.29 per cent, followed by Power Grid at 2.27 per cent.
Other winners were TCS 1.33 per cent, Asian Paints 0.89 per cent, HDFC Bank 0.85 per cent, Kotak Bank 0.77 per cent, HUL 0.73 per cent, ONGC 0.69 per cent, Yes Bank 0.29 per cent, Maruti Suzuki 0.29 per cent, Infosys 0.25 per cent and Adani Port 0.23 per cent, cushioning the overall index fall.
Sectorally, BSE realty fell the most at 1.90 per cent, followed by PSU 0.76 per cent, infrastructure 0.72 per cent, auto 0.71 per cent, healthcare 0.45 per cent, oil and gas 0.28 per cent, capital goods 0.27 per cent, FMCG 0.23 per cent, power 0.15 per cent and bankex 0.11 per cent.
While IT rose 0.48 per cent, Teck 0.34 per cent and metal 0.21 per cent.
The broader markets too succumbed to profit-booking, with the mid-cap index falling 0.81 per cent and small-cap index shedding 0.65 per cent.
Meanwhile, scam-hit Punjab National Bank (PNB) today posted a loss of Rs 13,416.91 crore for the January-March period, mainly on account of high provisioning for bad loans.
PNB shares ended lower by 3.80 per cent to Rs 86 a unit.
The bank had reported a standalone profit of Rs 261.90 crore in the fourth quarter of 2016-17.
Asian stocks also ended mixed as investors remained cautious about key economic and political risks, while supply concerns kept crude oil prices near 3-1/2-year highs.
Japan's Nikkei was down 0.21 per cent, Hong Kong's Hang Seng fell 1.23 per cent, while Shanghai Composite Index rose 0.57 per cent.
European shares were mixed after weak data from China and Germany added to a spate of less encouraging news on the global economy but the banking sector offered a ray of light after strong results from Austria's Raiffeisen Bank.
Frankfurt's DAX was down 0.14 per cent, while Paris CAC 40 rose 0.08 per cent. London's FTSE gained 0.22 per cent.
Brent crude futures, an international benchmark for oil prices, were at USD 78.96 per barrel, up 0.73 cents, or 0.93 per cent, while WTI traded at USD 71.37 per barrel, up 0.41 cents, or 0.58 per cent.