The index fell as much as 2.5% during the session, wiping out all its gains this year before clawing back some losses to close just 0.4% up year-to-date.
The market had jumped as much as 20% between January and May, led by foreign investors who have been net buyers every month this year as Saudi stocks joined the MSCI and FTSE Russell emerging market indexes.
The move onto the indexes caused the stocks to become over-valued, with the kingdom's slowing economy teetering on the brink of contraction
"Saudi Tadawul has lost more than 15% since May," said Vrajesh Bhandari, Senior Portfolio Manager at Al Mal Capital. "Valuations were expensive and fundamentals have caught up now. However, even with this we do not see value in large caps and therefore expect more downside."
"Investors need to be selective and we find interesting ideas within the midcap space," added Bhandari. "One area to have a close eye on is Government project spending on infrastructure and how much that translates into loan growth for banks."
Dubai's index was down 0.3% with Dubai's largest listed developer Emaar Properties dropping 0.8%.
Qatar's index rose 0.9% extending its gains for the fourth day, in a boost led by financial shares with Gulf's biggest lender Qatar National Bank advancing 1%.
In Abu Dhabi, the index was up 0.2% lifted by 0.4% gain in market heavy-weight First Abu Dhabi Bank.
Egypt's index closed 0.4% higher. Eastern Co gained 3.6% after the cigarette maker's board proposed an annual dividend of one Egyptian pound per share.
The market also received support from a decline in the country's annual urban consumer-price inflation rate to 7.5% in August, the lowest rate in years. The fall cleared the way for further rate cuts by the central bank, which delivered a rate cut in August.
SAUDI ARABIA The index dropped 1.4% to 7,855 points
ABU DHABI The index was up 0.2% to 5,106 points
DUBAI The index was down 0.3% to 2,885 points
QATAR The index gained 0.9% to 10,466 points
EGYPT The index rose 0.4% to 15,015 points
BAHRAIN The index was down 0.5% at 1,541 points
OMAN The index gained 0.5% to 4,017 points
KUWAIT The index lost 2.5% to 6,261 points
(Reporting by Maqsood Alam in Bengaluru, Editing by William Maclean) ((Maqsood.Alam@thomsonreuters.com;))