Leading the decline were hospitality shares, which fell sharply as Britain and some other countries banned flights from South Africa and its neighbouring countries, and placed restrictions on their citizens travelling there.
South African scientists said they had detected a new variant that had a "very unusual constellation" of mutations which were concerning because these could help it evade the body's immune response and make it more transmissible.
"This is devastating for the tourism sector which was hoping for a bumper December as borders had opened up. We expect that a wave of cancellations from travellers from the UK will be received over the next day or two," said Lloyd Miller, research analyst at ETM Analytics in South Africa.
"Granted this is not just a local issue, emerging markets are selling off hard in the Asian session but the news does render the rand and by extension other regional FX pairs more vulnerable as a result," Miller added.
News of the variant triggered a wave of selling of risk assets in both emerging and developed markets. Traders sought safety in U.S. and euro zone government bonds and the Japanese yen.
The rand dropped to as low as 16.368 against the dollar -- levels last seen before the news of vaccine breakthroughs in November 2020. The rand was last at 16.258, down 1.8%.
In fixed income, the yield on the local benchmark 2030 government bond jumped above 10%, its highest since early May 2020. The yields later retreated back to 9.9%, up 17.5 basis points.
The country's dollar-denominated bonds came under pressure with the 2041 issue dropping 2.3 cents to trade at 100.274 cents, Tradweb data showed. Five-year credit default swaps -- the cost of insuring the country's bonds against default -- rose 21 basis points from Thursday's close to 244 bps, IHS Markit data showed.
The South African Reserve Bank raised interest rates last week for the first time in three years and is expected to continue tightening into 2022 to curb inflation. But JP Morgan economist Sonja Keller said "the downside risk to near-term growth" may limit more aggressive tightening than a 25 basis points hike per meeting.
DUE A CORRECTION
Shares suffered, with the benchmark all-share index closing down 2.75% at 68,615 points and the blue-chip index of top 40 companies shedding 2.58% to end at 62,411 points.
"The new variant news is a trigger for a correction that was waiting to happen," said Wayne McCurrie, portfolio manager at FNB.
Markets are currently expensive and interest rate rises and inflation fears were taking the market towards a fall, he said. But the news of the variant advanced the drop, he added.
Leading the losses were hospitality companies City Lodge Hotels, down more than 15% and Tsogo Sun Hotels down 14% at market close.
Shares in Sun International, the owner of biggest casino chain and a network of hotels including the Sun City Resort, lost almost 6.5% of its market value.
The news out of South Africa hit broader emerging markets. The MSCI emerging markets equity index weakened 2.7% while the MSCI EM FX index dropped 0.4% , putting it on track for its worst day since August.
(Reporting by Olivia Kumwenda-Mtambo and Promit Mukherjee in Johannesburg and Tommy Wilkes in London, Editing by Shailesh Kuber, Raissa Kasolowsky and Toby Chopra)