The Tadawul All-Share Index (TASI) fell 1.3 percent to 6,191.51 points, its largest daily decline since Oct. 3.
"The market trading value gave a clear signal of liquidation," said Tarek Al-Mady, Riyadh-based financial analyst. "Traders took it as a cue to sell."
Turnover topped SR7 billion. Trading above SR5 billion is usually a cue for retail investors to exit, Al-Mady said.
"When the traders see volumes rising, they worry about something changing," added Al-Mady.
Large-caps deepened their losses, with Saudi Basic Industries Corp. (SABIC) and Samba Financial Group each down 1.3 percent, while Saudi Kayan Petrochemical slipped 2 percent.
In Cairo, the index gained 0.6 percent to 3,906 points as investors weighed signs that the new government was trying to address weak law and order and stave off a budget crunch against mounting evidence of a weakening economy.
In Dubai however, the index gained 0.4 percent to 1,393 points, on bargain-hunting by investors among stocks most likely to benefit from a possible upgrade by index compiler MSCI.
Bellwether Emaar Properties gained 1.4 percent, while contractors Arabtec and Drake & Scull rose 3.2 and 2.2 percent respectively.
"We came on the backdrop of European and international markets dropping yesterday yet we still saw some bottom-fishing on names like Arabtec and Emaar," said Fadi Al-Said, head of investments at ING Investment Management.
"It seems there is some buying into the MSCI decision. There is some hope that UAE might be upgraded. That seems to be driving the market."
Other Gulf markets fell on investor concerns that a resolution of the euro zone debt crisis remained elusive.
Oman's index eased 0.2 percent from Monday's 11-week high, with Galfar Engineering losing 1.4 percent and Oman Cement declining 1.2 percent.
Qatar's index dipped 0.4 percent to 8,764 points and Abu Dhabi fell 0.3 percent to 2,449 points, as First Gulf Bank fell 2.1 percent from Monday's four-month high.
Abu Dhabi Property stocks also slipped with Sorouh Real Estate and Aldar Properties down 1.1 and 2 percent respectively.
