The shock announcement sent shivers through the trading floor in Seoul and fuelled a political crisis in Asia's third-biggest economy, with the already unpopular Yoon facing a possible impeachment.
Investors are now keeping a close eye on developments in the country, with analysts pointing out that the upheaval comes as authorities steeled for the second presidency of Donald Trump, who has vowed to reignite his hardball trade policy.
The Kospi index shed as much as 2.3 percent at the open as traders fretted over the impact of the events overnight, when Yoon declared South Korea's first martial law in more than four decades, catching its global allies off guard.
He said the decision was made "to safeguard a liberal South Korea from the threats posed by North Korea's communist forces and to eliminate anti-state elements plundering people's freedom and happiness".
However, he backed down hours later when lawmakers voted to oppose the declaration, while thousands of protesters took to the streets and the nation's largest umbrella labour union called an "indefinite general strike" until Yoon resigned.
The won tumbled more than three percent to a two-year low of 1,444 per dollar after the declaration, then bounced back to around 1,415 following the U-turn.
The South Korean finance ministry looked to provide stability, saying it would deploy "unlimited liquidity" into the country's financial markets if necessary.
Michael Wan at MUFG warned that the country could face turmoil.
"While the worst negative economic impact to South Korea including on tourism and domestic activity, may have been averted in the near-term, political uncertainty could still remain," he said in a commentary.
"From a macro perspective, South Korea was already one of the more vulnerable countries to the impact of Trump's proposed tariffs, and this recent development could raise some further risk premium on the currency at least until we get clarity on political stability."
The losses in Seoul came as most other markets in Asia struggled, with Tokyo, Hong Kong, Sydney and Wellington down. Singapore, Taipei and Manila rose.
Wall Street had provided a healthy lead, with the S&P 500 and Nasdaq hitting fresh records as investors try to assess the chances of the Federal Reserve slashing interest rates again this month.
Meanwhile, Germany's DAX ended above 20,000 for the first time.
Even Paris eked out gains despite the brewing political crisis in France, where opposition lawmakers vowed to topple the three-month-old minority government of Prime Minister Michel Barnier in a no-confidence vote owing to a budget standoff.
The euro remained wedged around a 14-month low of $1.0500 on concerns about the outlook for the eurozone's number two economy.
Oil prices were barely moved after surging around 2.5 percent Tuesday on reports that major producers at the OPEC+ grouping were close to a deal to extend output limits.
Key figures around 0230 GMT
Seoul - Kospi Index: DOWN 2.0 percent at 2,450.89
Tokyo - Nikkei 225: DOWN 0.4 percent at 39,077.04 (break)
Hong Kong - Hang Seng Index: DOWN 0.3 percent at 19,687.75
Shanghai - Composite: DOWN 0.2 percent at 3,372.50
Euro/dollar: DOWN at $1.0504 from $1.0511 on Tuesday
Pound/dollar: DOWN at $1.2668 from $1.2673
Dollar/yen: UP at 149.91 yen from 149.53 yen
Euro/pound: DOWN at 82.92 from 82.94 pence
West Texas Intermediate: FLAT at $69.96 per barrel
Brent North Sea Crude: FLAT at $73.64 per barrel
New York - Dow: DOWN 0.2 percent at 44,705.53 (close)
London - FTSE 100: UP 0.6 percent at 8,359.41 (close)
