A fresh wave of panic selling wiped out $49 billion of stock market value across the Gulf Arab economies on Tuesday as the price of Brent crude oil dropped below $60 a barrel for the first time since 2009.
The stock market losses came on top of over $200 billion of value already destroyed since the end of October. Most of the frenzied selling has been by retail investors who fear governments will cut spending in line with falling oil revenues.
"We are in the panic mode now, there is no more support and investors are not rational any more," said Sebastien Henin, head of asset management at The National Investor in Abu Dhabi.
Dubai's index tumbled 7.3 percent to 3,084 points, a one-year low. The market has now retraced more than 50 percent of its massive rally from a multi-year low in January 2012 to this year's peak in May, a rise of 318 percent.
Abu Dhabi's benchmark ended 6.9 percent lower, posting its biggest daily loss in five years and also hitting a one-year low.
Investors ignored statements by officials and economists who said fears of sharply lower spending and growth were not justified.
Speaking at a conference in Dubai on Tuesday, an International Monetary Fund (IMF) official said that although the oil price plunge would cut revenues of Gulf Arab governments, they had big reserves so in general they would not need to reduce state spending significantly.
United Arab Emirates economy minister Sultan bin Saeed Al Mansouri said development projects would not be cut significantly in coming years and urged investors to remain calm.
But investors were dismayed by the speed of oil's decline and the fact that their governments do not appear to have tried to support oil prices. Heavily traded UAE blue chips such as Emaar Properties, Arabtec and First Gulf Bank sank their 10 percent daily limits.
One of the few UAE stocks to gain was Air Arabia, which can be expected to benefit from cheaper aviation fuel. The stock edged up 0.7 percent and was Dubai's third most heavily traded.
Saudi Arabia's bourse, which has the biggest share of petrochemicals among markets in the region, tumbled 7.3 percent in its biggest daily loss in six years and reached 7,330 points, its lowest level since June 2013.
Dozens of Saudi stocks fell by their daily 10 percent limits, indicating further potential weakness. The index has dropped 34 percent from its September peak.
While analysts think earnings in many sectors such as banking and retailing will not necessarily be dampened much by cheap oil, petrochemical firms are exposed as they will lose the competitive advantage they enjoy against foreign rivals from cheap feedstock. Also, the global economic weakness indicated by the commodities rout is a bad omen for petrochemical exporters.
Abdullah Alawi, assistant general manager and head of research at Aljazira Capital in Riyadh, said oil's plunge had served as a catalyst for a correction in an overvalued market, whose trailing price-to-earnings ratio had almost reached 21 in September, exceeding blue-chip benchmarks such as the FTSE 100 and S&P 500.
"That was way too expensive," he said. "Many stocks reached unrealistic valuations."
The market is likely to remain volatile until the Saudi government assures investors that it will at least maintain spending near current levels, many fund managers believe.
"We are waiting, especially in Saudi Arabia, for the government budget for 2015 to see whether the government would maintain its current expenditure levels or if they would cut down significantly," Alawi said.
"We need a big event like that, otherwise we will remain volatile and negative."
Saudi Arabia is expected to announce its 2015 budget by the end of this month, and possibly as soon as on Monday.
Elsewhere in the region, Qatar's index tumbled 3.5 percent and Kuwait lost 2.1 percent. Bahrain's bourse was closed for a national holiday and will reopen on Thursday.
Oman's benchmark dropped 2.9 percent to 5,409 points, its lowest level since August 2012. Unlike its bigger and wealthier Gulf neighbours, Oman is expected to reduce spending substantially and raise taxes to cope with lower oil revenues, and the government has already announced plans that include reducing gas subsidies.