Mumbai: Indian tech bellwethers Wednesday snapped their three-day winning streak to plunge more than 5% - the steepest single-day fall in almost four months - as rhetoric around AI's ability to dismantle revenue streams at the $280-billion legacy services industry re-surfaced to scuttle its nascent recovery from multi-year lows.

The Nifty IT index slumped 5.6% and dragged the benchmark Nifty up to 1.4% lower during the eventful day, with the broadest risk gauges see-sawing in response to news on the prospects of peace in West Asia.

"The severe declines and high volumes suggest that the sector is under tremendous pressure due to uncertainty with respect to IT, which drove traders to liquidate their positions," said Ajit Mishra, SVP Research, Religare Broking.

All constituents of the IT index declined on Wednesday. Tata Consultancy Services, still the biggest stock by market value in the Tata empire, cracked 8.3%, Persistent Systems tumbled 7.1% while LTM, Coforge and Tech Mahindra dropped 6.5% each. HCL Technologies and Mphasis fell 5.3% and 4.5% respectively during the day.

Ai Carnage TCS leads the rout with 8.3% crash; Persistent, LTM, Coforge, TechM, HCL Tech, Mphasis all bleed

Mishra likened the rare gains over the past three days to what's described as 'dead-cat bounce', reflecting the diminishing revenue prospects of a manpower-heavy industry that commentators believe is suffering for its inability to define a clear and visible outsourcing growth path in the AI era.

In the past three sessions, the Nifty IT index had jumped 7.6% while benchmark Nifty fell 1.7% in the same period. The decline in the IT index Wednesday erased 4.2% gains from the previous session, which marked the highest single-day gains in a year for the sector.

Still, while the stocks, once the firm favourites with overseas investors, are not expected to climb much, the downside could also be limited due to the extent of the fall in the current bear phase.

"The scar of AI disruption on IT stocks is deep as valuations for large caps have corrected significantly," said Siddarth Bhamre, head of research, Asit C Mehta Intermediates. "However, it's not expected to get deeper as the worst seems to be behind for the space.

There may not be a meaningful upside, but the downside is also likely to be limited, Bhamre said.

So far this year, the Nifty IT index tumbled 22.4% while benchmark Nifty dropped 10.4%.

The markets would look for cues from the forthcoming earnings season, said analysts.

"The action in the IT pack is expected to be choppy," said Sriram Velayudhan, senior vice-president, IIFL Capital Services. "While valuations have become attractive, AI related news flows could weigh on the sector in the short term."

Religare's Mishra said that Nifty IT was trading close to its 100-day exponential moving average of 31,500 on Tuesday and reached its short-term moving average in a single day, signalling weakness.

"There is no decisive trend in IT stocks, but further falls are anticipated as the tone remains bearish," he said.