"We (the management) reviewed the prevailing situation at the market and decided to close the market for Thursday," Nauman Ahmed, managing director of the Karachi Stock Exchange, said in remarks quoted by AFP news agency.
Since Friday, when serious fighting began on the Kashmiri border, the 100-share index has fallen by 16%, to close at 1,527.58 on Wednesday.
Tension between India and Pakistan, which have around a million troops at their borders, has escalated after a Pakistan-based, Kashmiri separatist attack last Tuesday killed 35 people, mostly wives and children of Indian soldiers.
India's leading share index closed down 1.9% at 3,114 on Thursday, a new low for the year.
Bombay's stock market has lost 9.3% since the fighting began.
Trading problems
Early reports from the Karachi Stock Exchange blamed the closure on technical problems with the trading system, which were caused by the volume of trade.
"We have taken this decision to avert further falls in the market and to facilitate the brokers who were still not able to settle their trade," Mr Ahmed said.
"At the moment there is no crisis in settlement or clearing. The exchange has a backlog of feeding in those transactions because we have considerable share volumes," he said.
Mr Ahmed said the exchange would try to re-open on Friday.
On Wednesday, the exchange again lowered the limit by which individual shares can fall in a single day to 2.5% from 5%, the second cut this week.
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