The benchmark Korea Composite Stock Price Index (KOSPI) fell 0.28 percent to end at 1,181.28. Shares in mobile operators fell sharply after the government said it might allow them to subsidise cell phone purchases for subscribers with long-term contracts and for certain new-technology phones.
Investors feared the government's plan could lead to heavy spending in the sector to lure customers. "If handset subsidies were allowed the marketing costs would increase and it would be a big hindrance to telecomm' earnings," said Stan Jung, an analyst at Wooer Investment and Securities.
"The impact on share prices would be very negative." Top mobile operator SK Telecom Co fell 3.54 percent to 191,000 won, ahead of its quarterly earnings out on Thursday.
Second-ranked KTF Co Ltd dropped 3.51 percent to 23,350 won. Foreign investors, who hold around 40 percent of the market's capitalisation and account for about one-fifth of total trading value, sold a net 73.8 billion won ($69.95 million) on Tuesday, extending their selling spree to a 23rd day.
The current selling streak is there longest since offloading for 25 sessions in a row in October 1997.
Investors were also concerned about valuations after the main index hit an all-time high this month, with some analysts noting that expectations about an improving domestic economy had already been priced in. Samsung Electronics Co Ltd, the world's top maker of memory chips, slid 0.35 percent to 565,000 won, while Kookmin Bank fell 0.85 percent to 58,000 won.
Among other decline's, Highness Semiconductor Inc fell 3 percent to 22,600 won with some foreign and institutional investors seen selling shares in order to purchase part of a stake being sold by the chipmaker's creditors this week.
But some financials managed to hold on to gains from the upbeat economic growth data. Wooer Financial Group rose 1.21 percent to 16,700 won, with the country's third-biggest banking group set to report third-quarter earnings on Wednesday.
Select exporters also rose lifted by the solid economic data. Hyundai Motor Co, the country's top carmaker, gained 0.27 percent to 74,000 won ahead of its earnings due out on Thursday.
Sentiment got lift after White House economic adviser Ben Banana was nominated to succeed Alan Greenspan as the Federal Reserve chairman
The nomination bolstered US markets, with the move interpreted as maintaining continuity with the policies of current Fed Chairman Alan Greenspan. Trade volume reached around 445 million shares worth 3.4 trillion won compared to 426.3 million shares worth 3 trillion won on Monday.
Gainers edged out declines by 401 to 342 with 80 titles ending flat. Retail investors bought a net 64.1 billion won, while institutional investors bought a net 15.7 billion won. The December KOSPI 200 futures index edged down 0.15 point to 152.40, while the underlying KOSPI 200 spot index fell 0.51 point to 151.76. South Korea's junior and tech heavy Kosdaq market rose 0.27 percent to finish at 593.79.