The Thai bourse yesterday sank as much as 3.29%, while the baht weakened to beyond the 31-barrier level amid a global rout.
Investors fretted over the Federal Reserve's increasing optimism over the US economic outlook and its plans to start winding down its stimulus programme this year.
The Bank of Thailand warned that the country continues to be exposed to risks from capital outflows.
The Stock Exchange of Thailand (SET) index yesterday did a nosedive below the psychological 1,400-point barrier at the opening bell and headed further south to the day's low of 1,390.33 before bounding off to close at 1,402.19, a decrease of 2.47%, in brisk trade worth 70.1 billion baht.
Foreign investors were net sellers of 6.35 billion baht.
A selling spree by offshore players was also seen in the Thai bond market, with net sales of 3.71 billion baht.
The Fed's policy board revised up next year's US economic growth forecast to between 3% and 3.5%, above the market consensus of 2.7%.
Chairman Ben Bernanke's remarks that the Fed may start winding down its US$85-billion-a-month asset purchase programme this year and terminate it in mid-2014 sent a ripple effect throughout the world.
The Indonesia Stock Exchange was the worst performer in Southeast Asia yesterday with a 3.68% slump, followed by the Philippines at 2.86%.
The baht fell the most in almost six weeks to 31.10/31.16 to the US dollar from 30.64/30.70 on Wednesday.
The currency has declined from this year's high of 28.55 _ also the highest level since the baht was floated in July 1997 _ in mid-April.
The baht's retreat against the greenback has apparently sparked a reversal of capital flows.
Foreign investors have unloaded 100 billion baht worth of Thai shares and bonds since May 23, when Mr Bernanke said the Fed would pare its stimulus once the US economy shows strong signs of recovery.
Pongpen Ruengvirayudh, a central bank deputy governor, said the baht's downward trend against the dollar could continue on the back of persistent asset liquidation on the part of foreign investors spooked by the latest signals from the Fed.
"Issues with the Fed are not the only factor contributing to the capital outflows. Potential economic growth in countries within this region is also encouraging a change in fund mobility. The central bank feels capital could continue to flow out of the country, depending on the US economic data," she said.
"As monitored, the capital outflows are not as worrying as others in the past."
Usara Wilaipitch, senior economist at Standard Chartered Bank (Thai), echoed Ms Pongpen's view.
She said some foreign investors who had not sold any assets after Mr Bernanke's speech last month, betting that the Fed could not take any action soon, have now started to liquidate assets in emerging markets, which could extend fund repatriation for a while.
"The baht is expected to weaken further. It could hit 31.50 or even 32 to the dollar by the third quarter," said Ms Usara.
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Writer: Darana Chudasri & Oranan Paweewun