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The Indian rupee traded close to 66 levels against the U.S. dollar on Tuesday after earlier surpassing the previous all-time low of 65.56. Markets crashed around 3 per cent tracking the rupee weakness, with the BSE Sensex falling over 520 points and the Nifty coming close to breaching the 5,300 levels.

The Reserve Bank of India (RBI) reportedly sold dollars starting at 65.90 levels, but after a brief recovery, the rupee again slipped near the day's low of 65.93.

The rupee fell 2.5 per cent as compared to Monday's close of 64.30. Traders did not rule out the possibility of the unit hitting 66 to the dollar later in the session as month-end dollar demand from importers continues to pressure it down.

Sustained foreign selling in equities continued to raise concerns about the gaping current account deficit. Overseas investors have sold about $810 million worth of shares in the previous seven sessions through Monday, adding to pressure on the rupee.

Meanwhile, Finance Minister P Chidambaram reiterated that the rupee has overshot its true level.

"We have to be patient and firm and do what is required to be done. Rupee will find its appropriate value," he said.

Mr Chidambaram also sought to allay fears that the $20-billion Food Security Bill passed by the Lok Sabha last night will widen India's alarming fiscal deficit even further.

"4.8 per cent of GDP is a red line as far as fiscal deficit is concerned. This red line will not be breached," the finance minister said.

His comments failed to convince investors though. "The Food Security Bill is the key reason for the rupee's fall today. It would open floodgates for (credit) ratings downgrades, if the fiscal deficit is not reined in," Ashtosh Raina, head of foreign exchange trading at HDFC Bank told Reuters.

There were contrarian views too. Mehraboon Irani of Nirmal Bang Securities told NDTV that markets knew the Food Bill was coming.

"It's not going to impact us in this fiscal year," he added.

Meanwhile, the selloff in the markets continued unabated. The Sensex was down around 470 points, while the Nifty traded at 5,330.

(With inputs from Reuters)