The benchmark Karachi Stock Exchange (KSE) index of 100 shares tumbled 1,252 points to 28,706, a drop of 4.18 percent — one of the largest falls in a single day in recent years.
Shares recovered somewhat to end on 28,971, down 3.44 percent.
The KSE has enjoyed startling growth in recent years even though Pakistan has been racked by militancy and political upheaval for more than a decade.
But from the start of January to March 29, the market saw an outflow of foreign investment of $131 million compared with a $384 million inflow last year.
“There has been selling from foreign investors for the past several months and the local investors were the buyers,” said Taha Khan Javed, head of research at Elixir Securities.
“But now their capacity to absorb more offloaded shares is over.”
Among the big losers was UniLiver Pakistan, which shed 425.05 rupees or five percent to close at 8,075.95 rupees.
Local investors were also worried over moves by the Securities and Exchange Commission of Pakistan to tighten regulations.
“The investors also desire to see a relaxation in the strict regulatory steps which hamper the flows of fund into the market,” Javed said.
Pakistan has been trying to boost its flagging economy since Prime Minister Nawaz Sharif was elected nearly two years ago.
Last week Moody’s upgraded Pakistan’s dollar bond rating one notch from stable to positive on the back of improving macroeconomic indicators.
The financial ratings firm said its decision came in view of strengthening foreign exchange reserves.