KSE benchmark 100-share index ended 2.33 percent, or 284.61 points, lower at 11,941.72, its lowest close since May 19.
Volume rose to 46.11 million shares, compared with 14.94 million shares traded on Tuesday.
"There is concern on the security situation about Karachi and in the absence of any buyers, we saw the market plunge by almost 300 points," said Sajid Bhanji, director at Arif Habib Ltd.
Dealers said a fall in global stocks also left foreign investors cautious.
World stocks tumbled towards five-month lows on Wednesday, and top-rated government bonds rallied as worries grew that fiscal cutbacks and stagnating factory output would prolong a global economic slowdown and aggravate Europe's debt crisis.
In the currency market, the rupee recovered from Monday's record low amid lack of import payments, but dealers expect the local unit to stay under pressure for now.
The rupee closed at 86.52/60 to the dollar, firmer than Monday's close of 86.75/80 on Saturday. It hit a record low of 86.83 on Monday and banks were closed on Tuesday.
Dealers said dollar payments are typically higher in July and August because of stronger oil demand and debt payments.
As well as oil payments, the International Monetary Fund's (IMF) stalled aid programme to Pakistan is also weighing the rupee down.
A cut in the key policy rate by the State Bank of Pakistan (SBP) over the weekend was also likely to accelerate the rupee's slide, said another dealer at a major local bank.
Dealers said increased remittances from Pakistanis working abroad had supported the rupee and shielding the currency from a sharp fall in recent weeks, but the increased dollar demand over the last week pushed the rupee lower.
According to official data, remittances rose to a record $11.2 billion in the 2010/11 fiscal year, an increase of 25.77 percent from the previous year.
In the money market, overnight rates ended unchanged at the top rate of 13.40 percent, just below the new policy rate 0f 13.50 percent, as the interbank market short of funds, dealers said.
Copyright Reuters, 2011