Karachi  - Pakistan stocks were dragged down on Friday to their lowest level since the beginning of the year on the central bank's interest rate hike and a cloud of political uncertainties and economic imbalances, analysts said.

The key KSE-100 Index of the Karachi Stock Exchange plunged by more than 4.7 per cent, losing 627 points by mid-day break at 12,979 points against Wednesday's close at 13,627 points.

The biggest loser was the financial sector, with the three largest banks of the country falling to their highest 5 per cent daily limits.

The central State Bank of Pakistan on Thursday spiked the country's benchmark interest rates by 150 basis points to 12 per cent citing rampant government borrowing as the main reason, which has ignited inflation to a 30-year high in the seventh most populated country in the world.

This is the second rate increase since January and dealers do not rule out further rises in the rates.

Each time the central bank increases its benchmark rate, popularly known as 3-day repo, it creates pressure on the market by making the central bank financial instruments, such as treasury bills, more attractive and secured than the stock market.

"It takes away institutional investors from the market into government securities," said dealer Ateeq Ahmed at Capital One Equities.

The rising overall inflation, currently hovering at around 11 per cent, is hurting the 146 billion dollar economy. Specifically, food inflation has doubled to 25.5 per cent from
12.2 per cent during the last 10 months, starting from July 2007.

"The inflation has reached an unsustainable level. No country depends so much on its central bank to meet fiscal deficit," Shamshad Akhtar, governor of the central State Bank of Pakistan said at a press conference on Thursday.

The government's borrowing doubled during the last 10 months of fiscal year 2007-2008 (July-June) to 944 billion Pakistani rupees (around 15 billion US dollars) from 452 billion rupees (7.5 billion dollars).

"This is dangerously at 9.44 per cent of the GDP (gross domestic product). This reckless borrowing stocked inflation and the ultimate price is paid by businesses, industry and ordinary citizens," Akhtar said.

Pakistan is also mired under political uncertainty. The seven-week old coalition government fractured last week over judges' reinstatement sacked by President Pervez Musharraf under an emergency order last November. Nine ministers from the federal cabinet, belonging to a major coalition partner Pakistan Muslim League party of former premier Nawaz Sharif, resigned on May 13.

On Friday there were media reports that the tensions had arisen between Pakistan Peoples Party (PPP), which leads the ruling coalition, and the embattled president.

Asif Ali Zardari, party's head and the widower of slain ex-premier Benazir Bhutto, said in a recent interview that his party was facing immense public pressure for ousting Musharraf. (dpa)