Mumbai, Jan 07 (Agencies): The BSE benchmark Sensex on Friday saw the biggest intra-day fall in 13 months, before recovering a bit, and closed below the crucial 20,000 mark as investors sold heavily on fears of interest rate hikes to tame inflation.

Besides, marketmen said there was lack of inflows from the overseas investors, as Indian stock valuations are now being viewed as considerably high.

They also said there was "policy paralysis" at the Centre, and the widening current account gap added to the woes of the street, already grappling with the fears of possible interest rate hike in view of rising inflation.

After a steep intra-day decline of 555 points, the Bombay Stock Exchange benchmark Sensex finally settled 492.93 points, or 2.44 per cent down, at a 3-week low of 19,691.81 --
the level last seen on December 15, 2010.

The key index, which has plummeted by over 869 points or 4.22 per cent in last four trading sessions, witnessed a Friday-like fall on November 27, 2009, when it had slumped by 645 points intra-day.

Similarly, the National Stock Exchange wide-based Nifty also witnessed a sharp dip of 143.65 points or 2.38 per cent to finish the day at 5,904.60.

"Inflation, which had moderated in November, has reared its ugly head once again, is the biggest threat to the Indian economy at the moment. There might be another rate hike by the RBI later this month and markets don't generally like rising interest rates as it increases borrowing costs and crimps demand," IIFL Research Head Amar Ambani said.

Panic selling across the board saw all the 30-Sensex shares and all the 13 sectoral indices ending the day in the negative zone with metals and auto as the worst hit.

In a major blow to the broader market, the heavy-weights including Reliance Industries and Infosys Technologies declined by 1.76 per cent and 3.15 per cent respectively.

Intense profit-booking in the metal stocks including Hindalco (down 7.02 per cent), Sterlite Industries (down 4.06 per cent), and Tata Steel (down 3.35 per cent) weighed heavily on the street.

The metal index was the worst performer among the 13 sectoral indices and saw a meltdown of 711 points, settling at 17,654.42.

"Metal stocks are inversely proportional to the dollar index which went up, dragging the metal shares down. Besides, the metal stocks in London Metal Exchange fell for the second straight day, which dampened the sentiment back home," SMC Capitals equity head Jagannadham Thunuguntla said.

Interest-rate sensitive auto stocks also continued to lose on the street with Tata Motors skidding by 5.52 per cent and Mahindra & Mahindra shedding 4.07 per cent.

Similarly, rate-sensitive realty and banking shares continued to be weak.

Among the major losers were -- Reliance Infra (down 3.82 per cent) and JP Associates (down 3.28 per cent), HDFC Bank (down 2.51 per cent) and SBI (down 0.97 per cent).

Besides, the subdued opening of European bourses spoilt the sentiment back home.

Among the other Asain markets, China's Shanghai ended firm with a gain of 0.52 per cent while Hong Kong's Hang Seng saw a decline of 0.42 per cent.