Financial shockwaves wiped off about US$7.5 billion (Dh27.54bn) from Saudi Arabia stocks yesterday.
The kingdom's bourse was the first global market to feel the effect of the US losing its top-tier "AAA" status, for the first time in its history, after Standard & Poor's cut America's rating.
The Tadawul All-Share Index dropped 5.46 per cent to 6,073.44, its most since the height of the Arab Spring. The decline followed as much as $2.5 trillion being erased from global stock markets last week as concerns about debt crises in the US and the euro zone triggered a sell-off.
"Equities around the world are much more riskier than they were last week," said Farouk Miah, an equity analyst at NCB Capital in Riyadh.
"The correlation with US markets has been very high in the region in the last few months, and the sell-off today is completely off global issues."
S&P late on Friday lowered the US long-term credit rating by one notch to "AA plus" in a move reflecting the weaker fiscal standing of the world's biggest economy. S&P warned the outlook was negative, an indication a further downgrade could happen in the next 12 to 18 months.
It is feared the first lowering of the US credit rating by a leading rating agency could trigger further turmoil in financial markets this week, potentially raising borrowing costs for Washington.
The action also raises fresh questions about the US dollar's dominance of the global financial and monetary system in the long term. China, the US's biggest creditor, criticised the country's government for losing its top rating and called for a new stable reserve currency.
Attention will now turn to GCC markets opening today. The Gulf has close ties to the US, with a large proportion of the region's oil wealth weighted in US dollars and five of the six regional currencies, including the dirham, pegged to the greenback. Saudi Arabia is also believed to be a big holder of US Treasury securities.
Worries about the US economy dropping back into recession, and the euro-zone debt crisis spreading, have taken their toll on oil markets. Oil prices dropped 9.2 per cent last week, the sharpest fall in three months. Crude was trading at $86.88 a barrel on the New York Mercantile Exchange on Friday.
Before S&P's cut of the US credit rating, US stocks fell the most in 32 weeks last week and European stocks posted their sharpest weekly loss since November 2008.
"Big falls in global markets reflect the problems the world economy faces, both in the US and euro zone," said Paul Gamble, the head of research at Jadwa Investment.
"We are going through a soft patch in the global economy and although the timing of the US downgrade is unfortunate, S&P had no option."
S&P said governmental deadlock in Washington was one of the reasons for the downgrade. Political wrangling was stopping the US from reaching an agreement about its deficit and debt problems, it said. Politicians last week reached a bipartisan agreement to find at least $2.1tn in budget savings.
"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the [US] administration recently agreed to falls short of what, in our view, would be necessary to stabilise the government's medium-term debt dynamics," S&P said.
Across the Atlantic in the euro zone, debt troubles are also still unfolding. Italy yesterday agreed to bring forward cuts to balance its budget in 2013, a year ahead of schedule, and usher through welfare and labour market reforms, said Silvio Berlusconi, Italy's prime minister.