Rising tensions between India and Pakistan have caused the biggest daily slump on the Karachi stock exchange in nearly four years.

Shares tumbled over 7% on the Karachi Stock Exchange (KSE) on Monday as the two countries' armies exchanged fire for a fourth day.

The KSE index lost 132.75 points - the largest fall in a single day since June 1998 - and closed at a four-month low of 1,651.26.

And in India, the rupee fell to a near-record low amid fears that the latest crisis, triggered by an attack on an Indian army camp last week, could escalate into all-out war.

Karachi market regulators have fixed a limit which automatically suspends the trading of blue chips if their value loses 7.5%.

Uncertainty

Pakistan's bourse has seen volatile swings in the past.

Fears of war between nuclear-armed regional rivals India and Pakistan have grown since an attack a week ago on a passenger bus and army base killed 35 people in the Indian-controlled part of the disputed Kashmir state.

India blamed Pakistani militants for the massacre, and ordered Pakistan to withdraw its high commissioner in New Delhi.

Muddassar Malik, director of BMA Capital in Karachi, told the BBC's World Business Report that the stock market decline was a direct result of the tension across the border with India.

"Given the current state of the market, the index has the prospect of falling by another 100 to 250 points," he said.

But he emphasised that the figures depended very much on how the situation on the border unfolded.

Economic impact

Pakistan's bourse has performed strongly this year overall, but incidents across the border and within the country itself have shaken the markets.

There is concern also that the unrest could derail the government's privatisation programme.

"People will review the situation in light of the prevailing political risk", Mr Malik said.

"The government will also have to evaluate and see what the current environment is," he added.

In India the stockmarket decline was less severe than in Pakistan.

At the close the Bombay index was down 1.53% at 3,282 points - resting at a three-month low.

India ratings risk

But analysts said India's credit rating could suffer if tensions along the border persist.

The international ratings agency, Standard and Poor (S&P), said the country's credit could be pushed closer to the edge - although not everybody agrees.

VK Choudray, managing director of India's credit ratings agency told the BBC's World Business Report that he remained optimistic.

"Even if there is something very serious on the borders, overall the corporates will be able to maintain their operation," he said.

He is worried however, that a decline in international investment and trade may affect India's global rating.