The index closed down 2.3 percent at 7,643.15 points after swinging between a high of 7,999.67 and a low of 7,421.71.
Investor sentiment deteriorated rapidly after presidential policy chief Kim Yong-beom raised the idea of a so-called "national AI dividend," suggesting that excess tax revenue generated from an AI-driven semiconductor boom could eventually be redistributed through public programs.
While Kim later clarified that he was not proposing a new windfall tax on corporations, the remarks heightened concerns over potential government intervention in corporate profits at a time when AI-linked semiconductor shares had already rallied sharply.
Foreign investors dumped 5.61 trillion won ($3.77 billion) worth of KOSPI shares, as institutional investors sold 1.21 trillion won. Retail investors absorbed the selling pressure, purchasing 6.68 trillion won worth of stocks.
Major chipmakers led the decline. Samsung Electronics fell 2.3 percent to 279,000 won, while SK hynix dropped 2.4 percent to 1,835,000 won as investors locked in profits following months of AI-driven gains. Battery and industrial names also came under pressure, with Samsung SDI plunging 8 percent, EcoPro BM falling 7.4 percent and Hanwha Ocean losing 6.5 percent.
The sharp reversal came despite continued strength in global semiconductor sentiment after the Philadelphia Semiconductor Index rose 2.6 percent overnight. However, rising oil prices and growing geopolitical tensions surrounding Iran further weakened risk appetite across Seoul's equity market.
WTI crude futures climbed 2.7 percent to $100.7 per barrel, while Brent crude rose 2.2 percent to $106.5 after U.S. President Donald Trump dismissed Iran's latest peace proposal and signaled that additional military options remained under review. The Volatility Index, jumped 8.9 percent to 18.7.
The Korean won weakened sharply alongside the equity selloff and rising oil prices, falling 1 percent to 1,489.4 per dollar from the previous session as investors moved toward safe-haven assets.
Within other parts of Asia, Japan led regional gains despite broader volatility. The Nikkei 225 rose 0.5 percent to close at 62,742.57, while the broader TOPIX also gained 0.8 percent as investors shrugged off hawkish signals from the Bank of Japan. SoftBank Group climbed 4.3 percent and Sony Group advanced 3.3 percent, although Fast Retailing fell 3.8 percent.
Chinese markets were comparatively stable. China's Shanghai Composite rose 0.3 percent to 4,214.5, while Hong Kong's Hang Seng Index slipped 0.1 percent to 26,369.7.
The tech-heavy KOSDAQ also closed lower, falling 2.3 percent to 1,179.30 after moving between an intraday high of 1,225.29 and a low of 1,142.49.
Unlike the KOSPI, foreign investors were heavy buyers on the KOSDAQ, purchasing 509.5 billion won worth of shares. Institutions sold 260.0 billion won, as retail investors offloaded 220.1 billion won.
Biotech shares showed relative resilience despite the broader weakness, with Alteogen rising 5.2 percent as investors rotated into defensive growth sectors. Robotics-related stocks also outperformed, with Cosmo Robotics surging 30 percent.
Game developer Pearl Abyss slipped 1.1 percent despite reporting record quarterly earnings driven by strong global demand for "Crimson Desert," underscoring how broader market volatility overshadowed upbeat corporate results.
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