Seoul shares briefly hit a record on Monday but then headed lower as exporters fell after China raised interest rates and on worries that troubles in U.S. subprime mortgages would hurt the world's largest economy.
China and the United States are South Korea's No.1 and No.2 export markets, respectively.
Steel maker POSCO Co. Ltd. and Samsung Electronics Co. Ltd. were among the day's leading decliners, sapping momentum in a main KOSPI that is still on the cusp of breaking 2,000 points for the first time.
China's rate hike is having an impact, although the effects may not last, as the move had been widely expected and was tamer than market expectations, said Kim Jeong-hwan, a strategist at Woori Investment and Securities.
Another factor today is worries about the U.S. subprime mortgage sector, he added. Unlike the news from China, this could potentially have a more long-term impact, given there is still a lot of uncertainty about it.
The benchmark Korea Composite Stock Price Index (KOSPI) fell 0.35 percent to 1,976.50 points by 0103 GMT, retreating from an all-time high of 1,989.82 early in the session.
That surpassed the last peak seen just on Friday, when the KOSPI ended at both a closing and intraday record.
South Korea's main index has surged 38 percent as of last week, due to expectations both the economy and corporate profits are headed for better times, especially in the second half of the year.
The gains have also been backed by a surge in money to mutual funds from retail investors.
For analysts, it's just a matter of time before the KOSPI breaks 2,000 points.
Could it come this week? It's possible, but it's very hard to tell. The market has become unpredictable. The biggest risk right now is how the U.S. markets will react to the ongoing problems in the U.S. subprime mortgages, Kim said.
Investors will also have to contend with China's rate hike, which came after the close of markets on Friday, as the country aims to keep inflation in check and prevent its economy from overheating.
China also slashed withholding tax on interest income on deposits, seeking partly to give savers less of an incentive to bet on the red-hot stock market.
Firms with ties to China fell, with POSCO down 0.72 percent to 549,000 won.
Investors also worried after Wall Street was battered on Friday by some disappointing earnings results and more signals that fallout from the risky subprime mortgage market may spread.
Samsung Electronics, the world's biggest memory chip maker, dropped 0.91 percent to 655,000 won.
But other technology stocks gained on expectations the long-underperforming sector could lead the market higher in the second half.
LG Electronics Inc. gained 1.65 percent to 79,900 won, after already advancing 8.3 percent in the two previous sessions following stronger-than-expected quarterly earnings.