Egypt's bourse suffered its largest one-day drop in four months on Sunday after hundreds of people were killed in a crackdown by the army-backed government on supporters of the Muslim Brotherhood.
Cairo's main index tumbled 3.9 percent to 5,335 points. It had dropped 1.7 percent on Wednesday, when security forces started taking action to disperse protesters, and was shut on Thursday because of the violence.
The market traded for three hours on Sunday instead of the usual four, to give time for people to return home before a curfew.
"Civil war is knocking on the door and lots of lives have been shed and I don't think it will stop here," Ali Adou, fund manager at Abu Dhabi investment firm The National Investor, said of Egypt's political situation.
"It will be a while before people will think of investing in the current environment."
The index fell on Sunday below major technical support around 5,450 points, where it peaked in May and July. The next, minor chart support is at 5,275 points, the late July low.
(Read more: How a US push to defuse Egypt ended in failure)
In addition to the bloodshed, the government has threatened to ban the Brotherhood, which could end remaining hopes for inclusive parliamentary elections and a return to civilian rule in coming months.
The closure of some major foreign-owned industrial facilities in the past few days, as well as the fresh blow to the tourist industry, suggest that even if billions of dollars in aid from Egypt's Gulf allies can keep it financially afloat in coming months, the economy could deteriorate further. The resulting unemployment could worsen social tensions.
The stock market is still up 19 percent from its June low, thanks to hopes that the ouster of President Mohamed Mursi would produce a more effective government. That leaves plenty of room for investors to sell further in order to lock in profits.
Some foreign investors and economists, such as VTB Capital's Middle Eastern chief economist Raza Agha, are discussing the possibility of Egypt following the example of Algeria, where a military crackdown on Islamists in the 1990s led to a protracted armed conflict.
"With the army and Al Azhar University's social standing likely damaged given developments since Mursi's ouster, and Egypt's Arab and Western bilateral partners having failed, it is not clear if anyone can play a mediation role," he wrote late last week.
(Read more: Muslim Brotherhood risks elimination)
Elsewhere, Saudi Arabia's benchmark climbed 0.3 percent to hit a new 59-month closing high of 8,157 points, boosted by petrochemical shares. The market is up 20 percent year-to-date; the petrochemical sector index rose 1.1 percent on Sunday.
The rally is partly driven by the market's break this month above 8,000 points, an important level psychologically.
"Investors are adding more risk and the break above the 8,000 level has kept the positive momentum," said John Sfakianakis, chief investment strategist at Saudi investment firm MASIC.
"The short-term outlook is for another leg up as additional liquidity is coming onto the market in selective names, including some banks and petrochemicals."
Some analysts, however, note the banking and petrochemical sectors posted only single-digit growth in second-quarter earnings, and argue this may not be enough to extend the bull run.
"We have started to see the market relatively overvalued," said Hesham Tuffaha, a Riyadh-based fund manager.
"There are many sectors that are being driven by strong growth but the largest sectors, banks and petrochemicals, have not posted double-digit growth, which is the only thing that can justify the sharp rally in the index."
The market may therefore come under pressure from profit-taking in the near term, he adds.
In the United Arab Emirates, Dubai's measure slipped 0.2 percent, trimming 2013 gains to 61.9 percent.
Small-cap real estate stocks surged, however, after lagging earlier this year. Union Properties jumped 10.8 percent to a three-month high; it is up 16.5 percent year-to-date. Volume in the stock was a massive 423 million shares, its highest in more than two years.
Deyaar Properties rallied 5.8 percent.
"Broad concerns in the real estate sector are dissipating and the discount to market was too much - it was only a matter of time that people looked at it," Amer Khan, director at Shuaa Asset Management in Dubai, said of Union Properties. "The discount is big enough to run the stock up for a while."
Elsewhere, shares in Oman's Al Hassan Engineering jumped 5.5 percent after its part-owned Abu Dhabi subsidiary won a 69.5 million dirham ($18.9 million) sub-contract for construction work. The firm said in a statement that the work would be completed in August 2014, though the project was still pending final approval by the ultimate client.
Muscat's benchmark climbed 0.2 percent to 6,847 points, marking its eighth straight gain and highest closing level since February 2011. It faces very strong technical resistance at 7,044 points, which capped the market in April 2010 and January 2011.
Egypt: The index dropped 3.9 percent to 5,335 points.
Qatar:The index gained 0.2 percent to 9,910 points.
Dubai:The index slipped 0.2 percent to 2,627 points.
Saudi Arabia: The index climbed 0.3 percent to 8,157 points.
Abu Dhabi:The index retreated 0.2 percent to 3,874 points.
Kuwait: The index advanced 0.5 percent to 8,135 points.
Oman: The index gained 0.2 percent to 6,847 points.
Bahrain: The index ticked up 0.03 percent to 1,201 points.