Seoul stocks slid 2.5 percent to a fresh seven-week low on Monday as investors sold interest rate-sensitive shares, but Shinsegae jumped after it said it would buy the South Korean outlets of Wal-Mart Stores Inc.
Major exporters including Samsung Electronics fell on worries that still higher US interest rates will be needed to fight inflation, sparking fears of a slowdown in the world's biggest economy, the second-biggest export market for Korean firms.
The benchmark Korea Composite Stock Price Index (KOSPI) dropped 2.46 percent to 1,338.59, after falling as low as 1,338.37 - a level last seen on March 31.
"Even one or two more interest rate hikes could kill consumption in the US, which will affect emerging markets," said Thomas Choi, head of research at PCA Asset Management.
Foreigners sold a net 101.9 billion won ($107.4 million) in shares, their ninth consecutive session of net sales.
Shinsegae Co bucked the wider market's trend, rising 6.6 percent to 460,000 won after the retailer said it would buy Wal-Mart's South Korean outlets for $882 million, strengthening its position as the country's top discount retailer. Rival Lotte Shopping Co, however, dropped 4.62 percent to 361,500 won on the prospect of heightened competition in the retail sector.
Shares sensitive to interest rates dropped, with Kookmin Bank falling 5.12 percent to 77,900 won and Shinhan Financial Group losing 2.17 percent to 45,000 won.
Commodity stocks were also under pressure, with Korea Zinc Co Ltd, the world's biggest zinc refiner, down 9.03 percent at 76,600 won as investors fretted about further declines in base metal prices.
Technology stocks lost ground, with market heavyweight Samsung Electronics Co Ltd down 2.19 percent to 624,000 won and LG Electronics Inc off 2.99 percent to 71,400 won. The stock market looked ripe for a technical rebound, with the 14-day relative strength index down at 25.00. A reading below 30 usually indicates oversold conditions.
Trading volume was 241.4 million shares worth 3.2 trillion won as of 0635 GMT, compared with 285.9 million shares worth 3.4 trillion won on Friday. Decliners beat gainers by 598 to 170, with 59 issues unchanged.
Retailers bought a net 90.1 billion won worth of shares, while institutional investors sold a net 49.8 billion won.
The June KOSPI 200 futures index shed 2.42 percent to 173.20, while the underlying KOSPI 200 spot index slid 2.44 percent to 173.60.
South Korea's junior and tech heavy Kosdaq market dropped 2.26 percent to 643.70.