South Korean shares dropped on Wednesday as concerns spread over economic slump in the United States following the weaker-than-expected manufacturing data.

The benchmark Korea Composite Stock Price Index (KOSPI) declined 33.1 points, or 1.74 percent, to close at 1,874.03. Trading volume stood at 615.13 million shares worth 4.62 trillion won (4.07 billion U.S. dollars).

The KOSPI started lower and stayed in negative terrain throughout the session as investors worried about the U.S. economy following the announcement of weak manufacturing data. The key index fell below the 1,900 mark for the first time in around 1 month.

The Institute for Supply Management (ISM) manufacturing index, a gauge of manufacturing activities, fell to 49.6 in August from 49.8 in July. The reading was slightly lower than the 50.0 consensus.

The weak data confirmed that the world's No. 1 economy continued to lose its momentum in the manufacturing sector, which account for around 12 percent of the U.S. GDP.

Despite the weak data, expectations for another round of quantitative easing in the U.S. remained low as the U.S. Federal Reserve Chairman Ben Bernanke reiterated at the Jackson Hole meeting that the central bank was ready to act if necessary.

Focus remained on Europe as European Central Bank (ECB) President Mario Draghi was expected to give more details about the new round of bond purchasing plan at the September monetary policy meeting scheduled for Thursday.

Institutional investors led the market decline by dumping a net 488.4 billion won worth of shares. Program-linked transactions posted net selling worth 498.3 billion won as the drop in the KOSPI200 index futures triggered massive arbitrage selling.

Foreign investors were net sellers, but their selling volume stood merely at 57.5 billion won. Retail investors purchased a net 549.6 billion won worth of shares, but they failed to shore up the KOSPI.

Large-cap shares ended bearish. Market bellwether Samsung Electronics retreated 2.4 percent to 1,189,000 won, and leading chemical firm LG Chem declined 2.5 percent to 298,000 won. Top automaker Hyundai Motor tumbled 3.8 percent to 227,000 won, and its affiliate Kia Motors slid 2.6 percent to 71,800 won.

The world's largest shipbuilder Hyundai Heavy Industries dipped 2.8 percent to 229,500 won, and the nation's top auto parts maker Hyundai Mobis slipped 2.5 percent to 296,500 won. Memory chip giant SK Hynix fell 1.4 percent to 21,200 won, and top life insurer Samsung Life Insurance closed steady at 94,700 won.

The local currency finished at 1,136.0 won against the greenback, down 2.9 won from Tuesday's close.

Bond prices ended higher. The yield on the liquid three-year treasury notes lost 0.03 percentage point to 2.74 percent, and the return on the benchmark five-year government bonds tumbled 0.04 percentage point to 2.82 percent.