The ringgit MYR fell almost 0.8% against the greenback, its steepest drop in seven months as investors reacted to the prospect of prolonged instability and compromise. The ringgit was last at 4.58 per dollar, off a two-month peak of 4.495 hit last week.
Kuala Lumpur stocks' benchmark index .KLSE fell more than 1% to its lowest level since Nov. 4, hitting a trough of 1,427.75.
Malaysia elected a hung parliament for the first time in its history, as the ruling Barisan Nasional, led by the United Malays National Organisation (UMNO) came a distant third.
That has left a conservative Malay Muslim alliance led by former prime minister Muhyiddin Yassin to battle it out with a multi-ethnic alliance headed by veteran opposition leader Anwar Ibrahim to find other partners needed to secure an outright majority. Read full story
"There is a question mark that is triggered by this rise of ethno-religious politics in Malaysia, with longer term implications for economic and social policy," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore.
"In the near term, the political uncertainty, along with the global economic slowdown, I think, should keep the upside pressure on the U.S. dollar/ringgit pair," he said -- meaning downward pressure on the ringgit.
Muhyiddin's Perikatan Nasional alliance won 73 seats in the lower house - secured backing from two political blocs on Sunday as he sought to form a new government, though had yet to win the required majority.
Having been a junior partner in the outgoing government, Muhyiddin could seek support within the defeated UMNO party to which he once belonged.
"This is not ideal for Malaysia, which has been dealing with political challenges for some time now," said Trinh Nguyen, emerging Asia economist at Natixis in Hong Kong.
"The results confirm the concern that even if a coalition is formed, no ruling party means it is very hard to move forward decisively, as politics is now taking precedent over economics."
