The turmoil in oil exporter Libya also weighed on market sentiment. It contributed to Wall Street's worst day since August and helped to send most Asian bourses lower for a second day on Wednesday.

"Risk appetite among foreign and local investors has reduced, leaving room for more downside in equities for the rest of this month," said Yu Raymin, chief investment officer of Prudential Financial Securities Investment Trust.

The main TAIEX share index fell 144.73 points to 8,528.94.

Hon Hai, Taiwan's biggest electronics parts maker, fell 1.35 percent. Touch panel maker Wintek lost 4.4 percent.

Tech shares were also pressured after Hewlett Packard Co trimmed its 2011 sales forecast and its shares plummeted 12 percent. HP is a Hon Hai client.

Steel shares were among the few gainers, up 0.18 percent, with the island's top steel maker, China Steel, up 1 percent after it said it plans a rights issue overseas for the first time in eight years.

Tourism shares closed flat, holding up as a Chinese tourism delegation visited Taiwan, raising hopes of a decision on a proposal to allow individual mainland citizens to visit Taiwan.

Foreign investors were net sellers of Taiwan stocks on Tuesday, with a total of T$17.6 billion. That brought total net selling this month to some T$83 billion, almost cancelling out last month's T$99 billion of net buying and on course for the biggest monthly net sales since May 2010.

Local media said some $1.5 billion of foreign funds left Taiwan on Tuesday.