South Korean equities experienced a sharp decline on Tuesday, with selling pressure hitting heavyweight chip stocks as investor concerns over an overextended rally resurfaced.

The Kospi index fell as much as 4.6% during the session, with shares of Samsung Electronics Co., Ltd. and SK Hynix Inc. both dropping more than 5%. In early trading, foreign investors sold over 2 trillion won ($13 billion) worth of Kospi constituents, while retail investors took the opportunity to increase their holdings.

Earlier this month, the benchmark index regained momentum towards a record high, breaching the 9,000-point level as investors appeared to look past uncertainties stemming from conflict in Iran. The index has since pulled back. Confidence in technology shares wavered in U.S. markets as SpaceX's stock fell, shifting focus to memory chip maker Micron Technology, which is scheduled to report earnings later this week.

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

The steep drop in South Korean stocks highlights the volatility of what has been the world's best-performing major equity market this year. Leveraged exchange-traded funds (ETFs) linked to chipmakers have amplified price swings, with the country's top financial regulator expressing regret over allowing the sale of such high-risk products.

"The decline seems to be mainly due to profit-taking after a sharp recent rally, as the market was clearly overbought," said Ha SeokKeun, chief investment officer at Eugene Asset Management in Seoul. "The rise in retail leverage and margin balances may have exacerbated the market's fall, making it more sensitive to negative factors."