The Tadawul All-Share Index (TASI) plunged 1.8 percent or 119.22 points to 6,486.83, its biggest drop since Jan. 29.

Reacting to Tadawul's fall on Wednesday, Hisham Tuffaha, head of investment research and financial analysis at Bakheet Investment Group, said there were no fundamental reasons for this fall. "This is due to uncertainty because of developments in Egypt," he said. "This is a temporary decline. The market will rebound soon."

Jarmo T. Kotilaine, chief economist at the National Commercial Bank (NCB), was not as optimistic. "The ongoing market volatility reflects investor anxiety about the continued political instability in the region," he said. "In the absence of a clear sense of direction, people revert to risk aversion, as we have seen so many times during the global economic crisis and the recent political unrest. A sustained recovery would likely necessitate some sort of a road map toward resolving the current tensions. In its absence, volatility is likely to persist."

Paul Gamble, head of research at the Riyadh-based Jadwa Investment, said: "Investors are nervous because of the events in Bahrain and regional political tensions are not abating."

John Sfakianakis, chief economist at Banque Saudi Fransi, said the drop is due to contagion fear in neighboring Bahrain. "Saudi Arabia is not insulated from events in the Middle East as seen two weeks ago with the sharp drop in the index by more than 6 percent in one day due to Egypt and now with Bahrain."

Dubai's index dropped 1.3 percent to a two-week low of 1,595 points.

Abu Dhabi's index declined 1.2 percent to 2,684 points, its biggest drop in two weeks.