Thailand's benchmark equity index fell 2% to a six-month low in the first trade since police turned water cannons on protesters in central Bangkok late on Friday in the most violent clashes yet over months of demonstrations.

The selloff was the steepest in four months as big turnouts at daily protests since a ban on gatherings was announced last week added to a sense of hardening resolve on both sides.

"Recent political developments from demonstration turn outs to the declaration of a state of emergency for Bangkok are unsettling investors' nerves," said Kobsidthi Silpachai, head of capital markets research of Kasikornbank.

"Such an atmosphere prompts investors to reduce risk as conditions become more 'business not as usual'."

The baht fell 0.1% to 31.24 per dollar on a day when the U.S. currency weakened against most other currencies. [.SO]

Prakash Sakpal, senior Asia economist at ING, said the so-far resilient currency could also succumb to escalating political risk.

"The equity market sell-off today seems to be the beginning of that trend," he said.

Protesters seek the removal of Prime Minister Prayuth Chan-ocha, a former junta leader, and reforms to reduce the powers of the monarchy. Prayuth has said he will not quit and the Royal Palace has made no comment on the protests.

Thailand has already suffered a record $9.3 billion in equity outflows so far this year as the COVID-19 pandemic wrecks the travel-exposed economy and protests threaten to delay its recovery.

"Domestic tourism may be completely dead if protests are prolonged, as they are spreading all over," said Chairat Triratanajaraspon, president of the Tourism Council of Thailand.

Graphic: Foreign investments in Thailand - https://fingfx.thomsonreuters.com/gfx/mkt/gjnpwlwjdvw/Graphic%20foreign%20investments%20in%20Thai%20equities%20and%20debt%20securities.jpg

(Reporting by Orathai Sriring in Bangkok. Additional reporting by Shashwat Awasthi in Bengaluru and Satawasin Staporncharnchai in Bangkok.; Writing by Tom Westbrook in Singapore; Editing by Tomasz Janowski)

By Orathai Sriring