The South Korean stock market tumbled sharply from its record highs, driven by heavy selling in heavyweight chip stocks, which reignited investor concerns over an overheated rally.

The Kospi index plunged as much as 8.3%, with SK Hynix Inc dropping over 11% and Samsung Electronics Co Ltd falling more than 8%. The Korea Exchange halted trading for 20 minutes, reactivating market protection measures that have been frequently used this month. By midday, foreign investors had offloaded 4 trillion won ($2.6 billion) worth of Kospi constituent stocks, while retail investors increased their positions.

Earlier this month, the benchmark index had regained momentum towards its all-time high, breaching the 9,000-point mark as investors appeared to overlook uncertainties stemming from the Iran conflict. The index has since pulled back. Market confidence in tech stocks wavered in U.S. markets as SpaceX shares fell, shifting focus to memory chip maker Micron Technology Inc, which is scheduled to report earnings later this week.

"The real test will be Micron's earnings this week," said Dilin Wu, a strategist at Pepperstone Group. "A strong report would be a direct positive for Samsung and SK Hynix, as the numbers will tell you if there's still growth momentum in the hardware side of the industry."

In recent days, the market had shown signs of overheating. SK Hynix Inc shares had risen more than 2% for eight consecutive trading days, and earlier this week its year-to-date gain was nearing 350%, outpacing the increase of its rival, Samsung Electronics Co Ltd.

The sharp decline in South Korean stocks highlights the volatility of the world's best-performing major stock market this year. Leveraged exchange-traded funds tied to chipmakers have amplified price swings, with the country's top financial regulator expressing regret over allowing the sale of such high-risk products.

"This sell-off appears to be primarily profit-taking after the recent sharp rally, as the market was clearly overbought," said Ha SeokKeun, chief investment officer at Eugene Asset Management in Seoul. "Rising retail leverage and margin balances may have exacerbated the market decline, making it more sensitive to negative factors."