India's main Sensex share index closed down 3.25% on Monday amid concerns high oil prices will drive the rate of inflation into double-digits.
Bombay's Sensex index closed 506.08 points down at 15,066.10, having earlier fallen 4.4% and slipped below 15,000 for the first time since March.
Other Asian indexes, including Japan's, South Korea's and Taiwan's, also fell.
Oil prices have surged to record levels, fanning fears that they will keep climbing and hurt world growth.
Central banks across the globe have warned that interest rates may have to rise as they look to keep inflation under control, despite the fact that economic growth is slowing in key nations such as the US and UK.
Indian traders now fear that any increase in interest rates could crimp demand and hasten a slowdown in corporate earnings growth.
"We are one of the weakest markets in emerging markets and any weakness in global markets will be just used as another excuse to hammer our market down," said independent analyst, Deepak Singh.
In May, Indian inflation stood at 8.2%.
Crude oil prices surged at the end of last week, with New York light, sweet crude putting in its biggest ever daily jump of $11 on Friday.
On Monday, oil prices slid slightly, though this did little to ease concerns.
Reliance Industries, one of India's biggest firms, was one of the main losers in Bombay, as was Infosys Technologies.
Software firms, which derive more than half their revenue from the US, were also buffeted on signs the US is headed for stagflation - simultaneous high inflation and recessionary conditions.
Some Indian traders now fear that many foreign institutional investors, faced with increased problems at home and an unwillingness to take on extra risks, will sell their emerging market holdings and leave the market.
According to official figures, foreign funds have sold shares worth $879m (445m) in the four days to Thursday, taking total outflow in 2008 to $4.8bn.
Mr Singh said the figures showed that foreign investors were "queuing up to exit" the Indian market.
Other countries also saw their shares slump, and Japan's main Nikkei 225 index slid 2.1% and Taiwan's Taiex lost 1.8%.
"Asian markets are certainly in for a heavy pounding over the next few weeks," said independent economist Andy Xie.