After nosediving over 1,459 points during the day, the 30-share index settled 893.99 points or 2.32 per cent lower at 37,576.62.
Likewise, the broader NSE Nifty tanked 279.55 points or 2.48 per cent to close at 10,989.45.
Shares of Yes Bank tanked over 55 per cent after the Reserve Bank of India (RBI) placed the lender under a moratorium, capping deposit withdrawals at Rs 50,000 per account for a month and superseding its board.
The 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 unusual move late Thursday evening came hours after finance ministry sources confirmed that State Bank of India (SBI) was directed to bail out the troubled lender.
Tata Steel was the top laggard in the Sensex pack, cracking over 6 per cent, followed by SBI, IndusInd Bank, HDFC, ICICI Bank and ONGC.
Bajaj Auto, Maruti and Asian Paints were the only gainers.
According to analysts, investors took the Yes Bank episode very negatively, raising questions on the stability of the overall Indian financial system.
Further, domestic stocks faced intense heat as the global markets continued their free fall on the back of coronavirus concerns, they said.
Bourses in Shanghai, Hong Kong, Seoul and Tokyo sank over 2 per cent.
European benchmarks were also trading significantly lower in their morning sessions.
Brent crude oil futures fell 2.54 per cent to USD 48.72 per barrel.
On the currency front, the Indian rupee depreciated 32 paise to 73.24 per US dollar (intra-day). ANS ABMABM