The Swiss Market Index (SMI) has slumped by more than four per cent since the start of the week amid fears that war in Iraq could go on longer than previously thought.
The loss is in line with global stocks which experienced their worst day in six months on Monday following a weekend of downbeat war news.
The 27-share SMI closed at 4,230.7 points on Monday, with all stocks in the red. The index continued its downward spiral in early trading on Tuesday, but recovered slightly to close at 4,263.
Monday's turnover, with around SFr2.3 billion ($1.67 billion) worth of shares traded, was in stark contrast to the SFr8 billion traded on Friday.
Stocks have soared during the past two weeks as confidence grew that the Iraq crisis could be brought to a swift conclusion.
But casualties suffered by coalition troops and fears of a tough battle ahead for control of Baghdad have sparked a rush of stock selling.
"When there are military setbacks, the market will go down," said Claude Zehnder, a market analyst with Zurich Cantonal Bank. "The market is 100 per cent focused on the Iraq conflict."
In New York, the Dow Jones Industrial Average fell 3.6 per cent to 8,214.7 on Monday night, its worst performance of the year. Frankfurt's Xetra Dax index plunged 6.1 per cent in late trade on Monday.
On the same day, the Swiss franc - traditionally viewed as a safe haven - also strengthened against the dollar. On Tuesday, the dollar was worth SFr1.39, a downward trend that will concern Swiss exporters.
Despite the day's gloomy figures, the SMI was above the all-important 4,000-point mark and comfortably clear of its low of 3,618 points earlier this month.
Analysts said the seven-year low was driven by a combination of the grim economic outlook, fears of war and poor results in key companies such as Swiss Life.
Oil price steady
Despite Monday's selling spree in stock exchanges around the world, oil prices remained steady, well below the levels reached earlier this year.
Crude oil hit almost $40 a barrel late last month as tensions with Iraq grew, before falling below $27 late last week.
On Tuesday afternoon, oil prices rose $29.25, a key indicator for how well the war is going, say analysts.
Investors were also wooed back to gold as stock markets fell. Gold prices have been unstable in the run-up to war and forecasts are difficult to make, because of the event-driven nature of the market.
swissinfo with agencies
Stocks and Iraq war
Last week's stock market rally, based on hopes of a quick victory for US-led forces, has melted away. A weekend of setbacks for coalition forces in Iraq saw markets open lower on Monday.
With share prices currently pegged to the progress of the war, much will depend on whether Baghdad falls quickly or whether Iraqi forces continue to put up stiff resistance.
Fears of a prolonged war have sent investors scurrying into gold, as well as pushing up oil prices.
In compliance with the JTI standards