Thai shares dropped 2.78% as world markets tumbled over continued fallout over the collapse of the Wall Street icon Lehman Brothers.
Fears that the US insurance giant AIG could follow Lehman into bankruptcy sparked a sharp selloff across the world.
The Stock Exchange of Thailand index closed at 624.56 points, down 17.83, in trade worth 13.92 billion baht. The index fell as low as 614.72 in early trading before late bargain-hunting.
Bank stocks dominated trade, falling 4.37% for the day as investors worried whether Lehman's bankruptcy would affect local banks. Kasikornbank, which denied any exposure to Lehman, fell two baht to 63, while Bangkok Bank dropped seven baht to 103.
Foreign investors, net sellers of 110 billion baht worth of local stocks this year, were net sellers of 2.16 billion baht yesterday, while retail investors were net buyers of 2.5 billion and local institutions net sellers of 349.8 million.
Trading boards across Asia were bright red yesterday, with Japanese stocks down nearly 5% to a three-year low, Hong Kong off 5.4%, Seoul dropping over 6% and Taiwan closing down 4.89%.
Analysts said short-term sentiment would continue to be driven by Wall Street and the state of the US economy.
SET president Patareeya Benjapolchai said Thai financial institutions and listed companies would suffer little direct damage from the Lehman bankruptcy.
But she acknowledged that share prices would be weighed down by poor global sentiment. For the year to date, the SET has lost 25% in value, largely the result of foreign investors' sales. Foreigners now control around 25% of the total market capitalisation of the SET.
The SET yesterday approved five asset managers for its new matching fund programme. Mrs Patareeya said the matching funds, which would include 100 million baht in investments per fund by the SET itself, would purchase shares of companies with solid fundamentals trading at good value.
The fund managers _ Ayudhya Fund Management, Thanachart Fund Management, Krungthai Asset Management, Kasikorn Asset Management and ING Mutual Fund _ would each create funds of 400 to 500 million baht in the scheme.
Pongpan Apinyakul, head of research at Kim Eng Securities and a director of the Securities Analysts Association, said the Lehman collapse would have a ''domino effect'' on the US financial sector.
He said local banks had only a small exposure to Lehman Brothers, but of greater concern is the US and global economy, and also local political risk.
The Bank of Thailand is now expected to freeze interest rates at 3.5% through the end of the year, and cut rates in 2009 as inflationary fears drop.
Mr Pongpan said the baht, which traded at 34.21/29 to the dollar yesterday, would likely appreciate over the next several months as the dollar weakened.
''For Thai stocks, it's unlikely the SET will fall under 600, assuming political tensions ease by year-end,'' he said.
A dissolution of Parliament could produce a short-term rebound to 670 points, while moves to appoint an interim government and amend the constitution could bring a rally to 700, he said.
''The most unlikely scenario would be protest violence or even a military intervention. We could see the index fall to 600 in that case, although the chances are unlikely,'' he said.