The Karachi Stock Exchange's benchmark 100 share index closed 4.7% lower on Monday in the first day's trading since the assassination of Benazir Bhutto.
Karachi shares had risen 47% so far in 2007
The exchange had been closed for a three day period of national mourning that began on Thursday.
The KSE100 index closed down 695 points at 14,077.
Traders said that the declines might be reversed if a deal could be reached between political parties that would let the 8 January elections go ahead.
Pakistan's currency has also fallen with the rupee at 61.85 to the US dollar, its weakest level since October 2001.
"This is a historic fall and is reflective of the unrest in entire country," said Nabeel Jafar from Zafar Moti Capital Securities.
"When there is killing of political leaders and riots after that, who is going to invest in the market?"
The Karachi Stock Exchange had already closed on Thursday before Ms Bhutto was assassinated, but stock markets elsewhere in the world were hit with New York's Dow Jones average falling 192 points, or 1.4%.
At the same time, the prices of so-called "safe haven" investments such as gold and government bonds rose.
The Karachi stock market has a history of recovering after political unrest.
When a state of emergency was declared on 3 November, the market fell about 10%, but then regained most of its losses.
Before Monday's falls the KSE100 index had risen about 47% in 2007. After the drop, it had still gained 40.2% in the year, making it the fourth-best performing stock market in Asia.
Helping attract money has been the country's strong economic growth, with many analysts predicting it to top 7% in 2008.
That has been boosting corporate earnings and consumer demand, helping foreign investment flow in, especially from oil-rich Arab countries.
Pakistan's stock market has also been helped by greater global demand for emerging market investments, and by President Pervez Musharraf's economic policies.