Regionally, a new wave of emerging-market fund exodus has also been driven by concerns over the US Federal Reserve's potential stimulus tapering.
The SET index Tuesday sank to this year's fresh intraday low of 1,353.02 points before bouncing back on bargain hunting to close at 1,370.86 in brisk trade worth 58 billion baht. Foreign investors were net sellers of 11.4 billion baht.
Thai shares plunged 5.18% over the past two days but still gained 0.72% year-to-date.
The baht Tuesday fell to 31.62/31.67 against the greenback on fund repatriation.
Tor Indhavivadha, the chief executive of Manulife Asset Management, said the SET index will likely fall below the 1,300-point level given the spate of negative factors including anxieties over the Fed's asset-purchase reduction, Thailand's disappointing economic growth and political uncertainties.
At that level, the Thai stock market's forward price-to-earnings ratio will decline to 11 times, the entry level of foreign fund managers in the past, compared with 13 times at present, he said.
Mahesh Fonseka, head of equity products at Manulife Asset Management (HK), said his company has underweighted Asian stock markets including Thailand due largely to the economic slowdown.
Political concerns also attributed to the underweight rating for Thailand, he said.
Bank of Thailand governor Prasarn Trairatvorakul said he is not worried about the baht's retreat, as it is in line with economic fundamentals.
The country now runs a current-account deficit of less than 1% of GDP, and the account may reach a balance by year-end, he said.
Pakorn Peetathawatchai, executive vice-president of the SET, said the sharp fall in the Thai stock market was in line with regional bourses and no special measures are necessary at the moment.
Investors now turn to risk-aversion mode to mitigate risk from the economic slowdown, he said, adding that foreign investors' sell-off in Thai shares could continue after selling more than 70 billion baht worth so far this year.
But any effect from foreigners' selling spree in Thai shares could be limited, as their remaining investment is worth 3-4 trillion baht out of the SET's total market capitalisation of 12.1 trillion.
Mr Pakorn said the SET is maintaining its market capitalisation target at 21 trillion baht over the next three years.
"The fund outflow is a global trend resulting from portfolio adjustment," said Padon Vannarat, a vice-president of Maybank Kim Eng Securities (Thailand) Plc.
He said the Thai stock market could stage a short-term rebound following the sharp retreat, but it would not be sustained, as a string of negative factors is still pressuring the bourse.
Mr Padon recommends 1,300 to 1,320 points as the entry level for investors.