The partially-convertible rupee slumped to a new record low of 66.25 against the dollar at the inter-bank foreign exchange market in Mumbai, surpassing the previous record low of 65.56 recorded on August 22.
The rupee later recovered to the 65-level, but closed at 66.24 -- a depreciation of 2.36 percent from its Monday's close of 64.72 against a dollar.
The free fall in rupee also led to heavy selling in the equities markets. The benchmark index of equities markets tanked by 600 points or more than three percent.
The 30-scrip sensitive index (Sensex) of the S&P Bombay Stock Exchange (BSE), which opened at 18,460.72 points, closed at 17,968.08 points, down 590.05 points or 3.18 percent from the previous day's close at 18,558.13 points.
The Sensex touched a high of 18,460.72 points and a low of 17,921.82 points during trade so far.
The wider 50-scrip Nifty of the National Stock Exchange (NSE) closed the day's trade down 189.05 points or 3.45 percent down at 5,287.45 points.
Earlier in the day, Finance Minister P. Chidambaram said the rupee had overshot its true level and that the phenomenon of depreciating currency value is being faced by other emerging markets also.
There were also concerns over the effect the Food Security Bill, passed by the lower house of Parliament Monday, will have on the current account deficit. The bill entails expenditure of nearly $20 billion.
Heavy selling by foreign funds too dampened sentiments, even as the government admitted that there were domestic factors behind the currency crisis.
The rupee was the worst performing currency among other emerging Asian currencies which also experienced record depreciation.
The Indonesian Rupiah, Malaysian Ringgit, Thai Baht and Peso of the Philippines fell to multi-year lows.
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