The rupee too depreciated 53 paise to 73.86 against the US dollar in morning session.
Incessant foreign fund outflow also spooked market participants, traders said.
After sinking 1,459.52 points in early trade, the 30-share index was down 1052.33 points, or 2.74 per cent, at 37,418.28, and the NSE Nifty plunged 318.30 points, or 2.82 per cent, to 10,950.70.
In the previous session, the 30-share BSE barometer settled 61.13 points or 0.16 per cent higher at 38,470.61, and the Nifty advanced 18 points or 0.16 per cent to finish at 11,269.
On a net basis, foreign institutional investors (FPIs) sold equities worth Rs 2,476.75 crore, while domestic institutional investors bought shares worth Rs 2,510.89 crore on Thursday, data available with stock exchanges showed.
Shares of Yes Bank tanked 25 per cent after the capital-starved lender was placed under a moratorium, with the Reserve Bank of India (RBI) capping deposit withdrawals at Rs 50,000 per account for a month and superseding its board.
Yes Bank will not be able to grant or renew any loan or advance, make any investment, incur any liability or agree to disburse any payment.
The rare move, made by the RBI and the government, came hours after finance ministry sources confirmed that State Bank of India (SBI) was directed to bail out the troubled lender.
SBI cracked over 6 per cent, and was among the top losers on Sensex.
IndusInd Bank, Tata Steel, Bajaj Finance, Axis Bank and Ultratech Cement were also in the red.
According to traders, investor sentiment was hit by intense selling in global equities as heightened volatility on concerns over the economic impact of coronavirus on world economies plagued markets.
Bourses in Shanghai, Hong Kong, Seoul and Tokyo cracked up to 3 per cent.
Stock exchanges in the US too ended up to 3 per cent lower on Thursday.
Global oil benchmark Brent crude futures cracked 1.04 per cent to USD 49.47 per barrel. ANSANS