The Sensex in Bombay has been hit by an outflow of foreign money

After an early drop of 3.2%, the benchmark Bombay Stock Exchange, the Sensex, recovered slightly to close down 256.16 points at 9,957.32.

The decline followed a 2.3% drop in the Sensex the day before.

Indian shares have fallen sharply since 10 May, when the benchmark index reached a record high of 12,612 points.

'Lost support'

Some traders said an increase in government-controlled fuel prices on Monday had sparked Tuesday's falls.

Others said investors were worried by comments from US Federal Reserve chairman Ben Bernanke, who said the central bank would take action if needed to keep a lid on inflation even as the economy slows.

Coupled with this concern about US interest rates, there has also been an outflow of foreign funds which had helped boost the index.

"The markets have lost support in the absence of fresh buying by mutual funds," said Soumeel Chakravarthy, dealer at brokerage KJMC Capital Market Services.

Shares first broke through the 10,000 mark on 6 February, boosted by foreign investors keen to pump in money.

The index has now fallen 20.75% from its record high in May.