Sensex plunged 1,677 points and Nifty fell 2.1%, with all Sensex stocks ending in the red.
Trump's remarks on Iran reignited geopolitical tensions, sending Brent crude up over 6%.
Rising oil prices, a weaker rupee and earnings concerns drove investors towards risk-off assets.
Stock Markets Slump Over 2% as Rising US-Iran Tensions, Spike in Oil Prices Dent Sentiment
Indian benchmark indices witnessed a broad-based selloff as escalating US-Iran tensions pushed crude oil prices higher, denting investor sentiment ahead of the earnings season
Stock Markets Slump Over 2% as Rising US-Iran Tensions, Spike in Oil Prices Dent Sentiment
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Equity benchmark indices Sensex and Nifty tumbled over 2% on Wednesday after US President Donald Trump said the interim agreement with Iran is over, leading to a sharp rally in crude oil prices.
Besides, investors shifted to a risk-off mode following pre-earnings anxiety over sluggish first-quarter forecasts amid a negative trend in global markets, traders said.
The 30-share BSE Sensex tanked 1,677.12 points, or 2.15%, to settle at 76,503.60. During the day, it plummeted 1,921.69 points, or 2.45%, to 76,259.03.
A total of 3,211 stocks declined, while 1,070 advanced and 173 remained unchanged on the BSE.
On similar lines, the 50-share NSE Nifty tumbled 516.65 points, or 2.12%, to end at 23,882.05.
"Indian equity markets witnessed a sharp sell-off as US President Donald Trump declared the interim peace deal with Iran is 'over' following Iranian attacks on commercial vessels in the Strait of Hormuz, reigniting geopolitical tensions and raising fresh concerns over global energy supplies," Ponmudi R, CEO of Enrich Money, an online trading and wealth tech firm.
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The renewed escalation triggered a sharp rebound in crude oil prices, which surged nearly 7%, sending shockwaves across global financial markets, he added.
All firms in the Sensex pack ended in the red. InterGlobe Aviation, Maruti, Hindustan Unilever, Bajaj Finance, Kotak Mahindra Bank and Mahindra & Mahindra were major laggards.
The BSE MidCap Select index tanked 2.14%, and the SmallCap Select index dropped 1.61%.
All sectors ended lower. Services fell sharply by 3.21%, PSU Bank (2.76%), MidSmall Private Banks Quality Tilt (2.74%), FMCG (2.54%), Financial Services (2.49%), Bankex (2.46%) and Top 10 Banks (2.34%).
Brent crude, the global oil benchmark, jumped 6.18% to $78.74 per barrel.
Meanwhile, the rupee tanked 59 paise to settle at 95.55 (provisional) against the US dollar on Wednesday.
"A global equity market sell-off triggered a massive correction in domestic benchmarks as investors turned risk-averse following a fresh wave of conflict in West Asia. A strong upsurge in crude oil prices, coupled with a sharp fall in the currency against the dollar, dampened sentiment," Ankur Punj, MD & Business Head at Equirus Wealth, said.
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Indications that a ceasefire between the US and Iran might fall apart also prompted investors to exit stocks at will, he added.
In Asian markets, South Korea's Kospi tumbled 5.35%, Japan's Nikkei 225 index declined 2.11%, and Shanghai's SSE Composite index dipped 0.49%, while Hong Kong's Hang Seng index jumped 2.99%.
European markets were trading significantly lower.
US markets ended in negative territory on Tuesday.
Foreign Institutional Investors (FIIs) bought equities worth ₹393.19 crore on Tuesday, according to exchange data.
In the previous session, fag-end selling dragged the Sensex lower, leading the benchmark to settle 104.35 points, or 0.13%, down at 78,180.72. The Nifty dipped 31.65 points, or 0.13%, to end at 24,398.70.