The Tadawul All-Share Index (TASI) plunged 6.75 percent to 5,760.33, led by petrochemicals giant Saudi Basic Industries Corp. (SABIC), after oil prices fell more than $2 a barrel and the euro continued its slide.

The Tadawul index suffered its largest loss in 18 months, heading a rout in Middle East markets as a fall in oil prices sparked panic selling in the world's top crude-exporting region. Shares of SABIC, which makes up one-fifth of Saudi market capitalization, dropped the maximum allowed 10 percent, to close at SR76.75, down SR8.5 from Monday's close of SR85.25. The Saudi petrochemicals index fell 9.4 percent, taking its losses to 27 percent in three weeks, mirroring a 21 percent drop in oil prices over the same period.

Commenting on Tuesday's market plunge, Faisal Alsayrafi, managing director and CEO of the Financial Transaction House (FTH), said: "Tadawul is linked to global markets. The economic turmoil around the world, especially in the US and Europe, affects TASI directly." He also said the falling euro also had an adverse impact on Tadawul.

John Sfakianakis, chief economist at Banque Saudi Fransi, said: "The sharp drop is more related to investor repositioning and panic selling which is mostly unjustified as the fundamentals of the Saudi economy are solid and extremely healthy even with oil in the mid $60s range."

All regional markets tumbled as nervy investors sold across all sectors. Abu Dhabi made its largest fall since Dec. 8, Egypt slumped to a six-month low and Oman dipped to its lowest close of 2010.

The Egyptian index dropped 6.1 percent to 5,938 points. The index in Qatar fell 4.2 percent to 6,647 points. The Dubai index dipped 4.6 percent to 1,570 points. The Abu Dhabi benchmark fell 3.1 percent to 2,650 points.

The Kuwaiti index dropped 2.7 percent to 6,802 points. The Omani index fell 3.2 percent to 6,242 points and the Bahraini index fell 1.9 percent to 1,455 points.

Lenders were hammered region-wide, with Al-Rajhi Bank dropping 7.3 percent, Commercial Bank of Qatar falling 5.4 percent and Abu Dhabi Commercial Bank losing 5.6 percent.

World stock markets were also sharply lower. The Dow Jones industrials plunged below 10,000. The Dow fell 248.79, or 2.5 percent, to 9,817.78. It closed at 10,066 on Monday and has fallen 1,388 points, or more than 12 percent, from its recent high of 11,205, reached April 26.

The Standard and Poor's 500 index fell 26.76, or 2.5 percent, to 1,046.89, while the Nasdaq composite index dropped 60.86, or 2.8 percent, to 2,152.69.

Britain's FTSE 100 dropped 2.8 percent, Germany's DAX index tumbled 2.8 percent and France's CAC-40 plummeted 3.7 percent. Japan's Nikkei stock average fell 3.1 percent.

"What's driving the markets so badly at the moment is concern about European banking risk, with a focus on savings banks in Spain after the restructuring of CajaSur," said Bob Parker, vice chairman of asset management at Credit Suisse.

A rise in geopolitical tensions between the two Koreas after North Korean leader Kim Jong Il ordered his military to go on a combat footing exacerbated an already nervous market. "We still have all of the euro zone fears, and there are increased tensions between North and South Korea," said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco.

Oil fell below $68 a barrel as investors fled from riskier assets to dollar safety on growing concerns that the European debt crisis could worsen and damage the still fragile global economic recovery.

A slide in world stocks to their lowest since September 2009 also weighed on sentiment as equities are seen as a key indicator of future energy demand growth. US crude fell $2.31 to $67.90 a barrel by 1103 GMT after closing near the key $70 psychological threshold the previous three sessions. Brent crude was down $2.22 at $68.95.

"It was certainly not a good start of the week for the energy market for those expecting a recovery for crude oil prices back to the previous range of 70-75 dollars," said Sucden analyst Myrto Sokou. "The energy market is likely to receive further pressure from the robust US dollar in the near term and the general negative sentiment in the global financial markets."

The Organization of Petroleum Exporting Countries is "not yet" concerned by the decline of oil prices below $70 a barrel, Kuwaiti Oil Minister Sheikh Ahmad Abdullah Al-Sabah said Tuesday. "Not yet," Sheikh Ahmad told reporters when asked if OPEC was worried. "So what?" he added.

The US dollar index rose 1.3 percent as investors diverted money from commodities into the greenback. The euro approached a four-year low, which it set last week. The euro dropped to $1.2218, bringing it within a penny of the low of $1.2146 it touched last week.

Spot gold prices rose $6.90 to $1,198.40 an ounce, after earlier rising to $1,200.15.

— With input from agencies