MICEX, the exchange where the bulk of trading in Russian stocks takes place, plunged 5.5 per cent, while the RTS, a leading index, lost 5.6 per cent to sink beneath 2,000 points for the first time since March.

The RTS is now down more than 20 per cent from its mid-May high, pushing it into technical bear territory.

After Prime Minister Vladimir Putin's scathing attack on Mechel late Thursday, heavy trading in New York sent the steel and coal maker's stock down nearly 40 per cent, wiping more than US$5 billion off its value. The losses were mirrored Friday in Russian trading.

Putin criticized the company, which is the largest supplier of coal to steelmakers in Russia, for charging much higher prices domestically than for exports. He called for an antitrust investigation.

Earlier Thursday Robert Dudley, CEO of embattled Anglo-Russian oil producer TNK-BP, left the country three days before his visa was due to expire. Russia did not renew the visa on the ground that he allegedly does not have a valid work contract.

Dudley, who said his departure follows a sustained assault on the company, vowed to run TNK-BP from abroad.

The developments rattled investors, leading to a heavy sell-off in Russian equities, which are dominated by oil stocks.

"Sentiment is moving against Russia," said James Fenkner, managing partner at Red Star Asset Management in Moscow.

"If oil has any kind of bounce, the market will look kindly on Russia. If oil begins to slip, there will be a great unwind."

Observers say soaring energy prices have largely masked political tensions, and investors are watching how the conflict plays out at TNK-BP, widely seen as a test case for foreign investment under new President Dmitry Medvedev.

Medvedev, who campaigned on an anti-corruption ticket, has insisted the conflict is a matter between the shareholders. Many analysts are convinced, however, that the state wants to take control of the company.

Observers see the onslaught on Mechel as heralding a politically motivated attack of the type that brought the Yukos oil company to its knees and wrought lasting harm on Russia's investment image.

"I think the probability of this becoming a Yukos-style asset grab is relatively small," said Red Star's Fenkner. "But if it's an asset distribution, then all bets are off."

In a research note, Chris Weafer, chief strategist at UralSib, said, "The last train carrying the optimists out of Russian equities has just left the station. Let's hope it's just for a vacation rather than emigration."