The benchmark KOSPI fell 6.02 percent or 324.11 points to close at 5,059.69.
The index plunged more than 8 percent within minutes of the opening bell, triggering a circuit breaker that suspended trading for 20 minutes. A sell-side trading curb was also activated after trading resumed.
Institutional buying later helped the index recover above 5,000, although the market remained under heavy pressure through the close.
Foreign investors sold 2.77 trillion won (US$2.04 billion) worth of shares, while institutions bought 1.7 trillion won. Retail investors purchased 605.1 billion won.
Friday's decline followed a 5.28 percent drop the previous day, bringing the KOSPI's cumulative losses over the two sessions to nearly 11 percent.
The selloff came as investors reassessed the outlook for AI infrastructure spending following the Democratic Party's sweeping victory in the U.S. midterm elections.
Concerns have grown that tighter oversight of data center construction, particularly restrictions involving electricity and water consumption, could delay new projects and weaken demand for semiconductor equipment and memory chips.
The anxiety intensified on Wall Street overnight, when the Nasdaq Composite plunged 5.52 percent and the Philadelphia Semiconductor Index tumbled 12.25 percent.
Reports that Microsoft was stepping up oversight of data center projects involving neocloud partners added to concerns over financing and the pace of AI infrastructure expansion.
South Korea's memory chipmakers have been particularly vulnerable because their earnings depend heavily on demand from AI servers and data centers.
SK hynix plunged 9.97 percent to 1,138,000 won, while Samsung Electronics dropped 6.4 percent to 188,700 won.
Both companies have fallen sharply from their June peaks, when enthusiasm over AI investments drove memory chip shares to record highs.
The recent losses have raised questions over whether the market is experiencing a deeper downturn in AI demand or a correction following an extraordinary rise in semiconductor valuations.
Samsung Electronics and SK hynix together account for roughly half of the KOSPI's market capitalization, making the broader index particularly sensitive to changes in their share prices.
The concerns extend beyond demand for AI chips. Memory prices have risen sharply during the investment boom, leaving manufacturers exposed to potential price corrections if data center construction slows.
However, analysts have cautioned that tighter oversight of new projects does not necessarily mean existing investments will be canceled.
SK Group Chairman Chey Tae-won said Thursday that excessive investment flows into AI and semiconductor stocks had contributed to extreme market volatility, although he maintained that companies would need to continue investing to remain competitive.
Other technology-related shares also suffered steep losses.
SK Square plunged 10.4 percent to 725,000 won, while Samsung Electro-Mechanics dropped 8.79 percent to 862,000 won.
Hanmi Semiconductor fell 6.6 percent to 157,800 won, extending losses across companies supplying the semiconductor industry.
Power equipment maker Hyosung Heavy Industries tumbled 12.6 percent to 1,565,000 won, while Samsung E&A declined 6.1 percent to 60,400 won.
KB Financial slipped 3.9 percent to 150,900 won.
Despite the broad decline, several stocks posted gains. Hanjin KAL climbed 4.6 percent to 199,200 won, while Naver rose 1.7 percent to 188,100 won. KT gained 2.9 percent to 53,300 won, helping telecommunications stocks outperform the broader market.
The government also moved to contain further market disruption, announcing that brokerages would be exempt from the requirement to maintain a 140 percent collateral ratio on margin loans for three months starting Monday.
The temporary measure is designed to reduce forced selling of shares purchased with borrowed money, which could otherwise accelerate market declines.
The tech-heavy KOSDAQ fell 5.03 percent, or 34.14 points, to close at 644.27, after trading between 629.17 and 657.95.
Retail investors sold 110.4 billion won worth of shares, as foreign investors unloaded 100 billion won. Institutions bought 205.6 billion won.
Semiconductor-related stocks led the decline, with Jusung Engineering falling 9.5 percent to 132,700 won and Simtech dropping 8.1 percent to 92,700 won.
Alteogen lost 5.9 percent to 199,000 won, while MS Bio plunged 22.3 percent to 6,260 won. EcoPro also declined as selling pressure spread across battery-related shares. By contrast, Elice surged 19.8 percent to 70,300 won, while Wonik Holdings gained 4.5 percent to 28,150 won. Revelup advanced 4.9 percent to 10,780 won.
Throughout Asia, Japan's Nikkei 225 plunged 5.96 percent to 57,434.77, while China's Shanghai Composite fell 1.10 percent to 3,649.18. Hong Kong's Hang Seng Index declined 1.39 percent to 24,452.11.
The South Korean won strengthened 0.2 percent to 1,354.9 won per dollar.
Oil prices rebounded but remained on course for steep weekly losses amid expectations that diplomatic efforts could ease tensions between the U.S. and Iran.
West Texas Intermediate crude gained 1.4 percent to $91.76 a barrel, while Brent crude rose 1.7 percent to $99.94.
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