The country's stock market monitor halted trading at the main bourses after share prices tumbled more than 10% within 20 minutes of the market opening as investors panicked about the economic policies of the incoming communist-supported government of Sonia Gandhi.
The benchmark index of the Bombay Stock Exchange, the Sensex, opened sharply lower and tumbled further to 4516.6 points in a 10.9% drop before the Securities and Exchange Board of India ordered trading to be suspended for an hour. The National Stock Exchange, the country's largest, plunged 11.5%.
The plummet, which stock exchange officials said was the biggest single-day fall, came despite a warning issued by the Securities and Exchange Board of India to be "extraordinarily watchful of any unusual movements in the market and report to SEBI immediately."
Brokers said the volatility in the market would continue until the new government's policies, especially those on privatization of state-run companies, were made clear.
The market dived on fears the Congress party, set to form a new government after ousting the ruling National Democratic Alliance in elections last week, may slow privatization of state-run companies and undo market-friendly policies to appease the leftists, whose support is crucial for a parliamentary majority.
The Congress party, however, said the market fears were misplaced.
"I am puzzled by the market crash," Pranab Mukherjee, a senior Congress official, told the CNBC news channel.
Mukherjee has been asked by Gandhi to consult the communists and other allies and draft a "common minimum programme" outlining the economic and foreign policies of the new government.
Mukherjee said market players were acting in haste, instead of waiting to see the content of the document.
"Our efforts would be to create a market-friendly atmosphere" for investors, Mukherjee said. "We want to achieve 8 to 10% growth for the economy," he said.