The Chinese central bank's shocking move to devalue the yuan a second time in as many days sent Singapore shares spiralling to their biggest one-day decline in almost four years.
Investors fear that the Singdollar, which closely tracks the yuan, will continue to weaken further as a result of China's actions.
The devaluations also served to confirm investor worries that the Chinese economy is in poor health.
The ensuing panic caused the Straits Times Index to fall 91.57 points, or 2.9 per cent, to 3,061.49.
Local stocks have not dropped so sharply since October 2011, when the market was gripped by concerns over a debt crisis in the euro zone and the United States.
Singapore was the second-worst- faring bourse in the region yesterday after Jakarta, which tumbled 3.1 per cent. Hong Kong dropped 2.4 per cent, Tokyo fell 1.6 per cent, Shanghai declined 1.1 per cent and Seoul retreated 0.6 per cent.
Despite the poor showing here, UBS Wealth Management's chief investment officer for Southern Asia Pacific, Mr Kelvin Tay, said in a note yesterday that he is more optimistic about the Singapore market than other Asian bourses as it tends to be among the less volatile ones in the region.
"With an already volatile investing environment likely to get more complicated over the next six months, we are reducing the risk levels in our Asian strategy and focusing on the traditionally more defensive markets in Asia," he said.
This was of little comfort to punters yesterday, who bailed out of the local market in droves, leaving 29 of the 30 STI stocks in the red.
Some 1.55 billion shares worth $1.82 billion changed hands.
Commodity stocks continued to be punished as commodity prices fell yesterday on concerns that a softening Chinese economy will dampen demand for raw materials.
Noble Group dropped 6.5 cents to 50.5 cents, even though the firm bought back 12.3 million shares yesterday, taking its stake in itself to 3 per cent.
Olam International slipped six cents to $1.73, Wilmar International lost four cents to $3.03, Indofood Agri Resources declined two cents to 55.5 cents and Golden Agri Resources gave up 1.5 cents to 30.5 cents.
The three local lenders also suffered sharp falls of at least 4 per cent each. DBS Group Holdings, OCBC Bank and United Overseas Bank have been making inroads into China and a weaker yuan will hurt their earnings, said Daiwa Securities Group analyst David Lum.
"Their exposure to China provides additional headwinds for the Singapore banks," he told Bloomberg. "Their base is still Singapore and Asean, which is also not doing well."
DBS dropped $1.09 to $18.64, OCBC slid 58 cents to $9.50 and UOB lost 88 cents to $19.98.