Asian equities and currencies tumbled at the start of the week as investors grew nervous over the effects of rising oil prices, China's economic growth and a likely interest rate increase in the United States.
South Korea's benchmark share index plunged almost six percent on Monday and closed below the psychologically important 800 point level.
Traders said the losses were part of a region-wide correction in stock markets, which rose rapidly last year.
Richard Firth, the head of investment at Schroder's bank in South Korea, says investors are pulling out of stocks because an expected interest rate hike in the United States will make bank deposits more attractive. The U.S. Federal Reserve is expected to raise interest rates soon as the economy gains strength, and rates in much of Asia are likely to rise also. Mr. Firth says many investors had borrowed money to buy shares in South Korean companies that have benefited from China's fast growth. They now are selling those shares to cover their debts.
"It's been very easy for foreign investors to borrow money in dollars at very low interest rates and to buy stocks in [South] Korea? That's unwinding because interest rates are going to go up so it's no longer as cheap to borrow," explained Mr. Firth.
He also says investors worry that China's leaders will not be able to gently slow economic growth, and the country could face a painful slump. Beijing wants to cool the economy slightly to avoid high inflation and the construction of unneeded homes and factories.
Mr. Firth says other stock markets with exposure to China also are falling. Taiwan's main share index, the Taiex, fell by three and a half percent on Monday. In Japan, the benchmark Nikkei sank by almost five percent.
Hong Kong's Hang Seng also ended three and a half percent lower. China shares were among the big losers.
Investors are also pulling out of Asian currencies and buying dollars, to benefit from the expected rise in rates.
The U.S. dollar hit an eight-month high against the Japanese yen on Monday and was trading at 112.70. The Australian dollar dropped by more than two percent to under 70 U.S. cents.
Mr. Firth says Asian economies had been boosted in recent months by China's rising demand for raw materials and consumer products.
Some analysts say that demand may slow as China's manufacturing and construction companies face rising oil prices.
"Basically, the cost for manufacturing [will] increase as a result of high oil price," said Qu Hongbin, an investment analyst in Hong Kong with the bank HSBC. "That itself will have some sort of a negative impact on industrial growth."
Mr. Qu notes China's leadership is using a variety of tools, such as price caps, to cool economic growth to sustainable limits. However, he does not rule out the possibility that China's economy could crash if the brakes are hit too hard.