Brazil's stock market, Bovespa, plunged more than 10% immediately after opening Thursday, wiping out almost all of its gains for the year. Officials halted trading for 30 minutes.
Brazil's currency, the real, also tanked 7% against the dollar, its worst day since the global financial crisis in 2008.
The selloff came after new bribery allegations surfaced against Brazil's president, Michel Temer.
A prominent Brazilian newspaper, O Globo, reported Wednesday night that Temer paid a bribe to the former House Speaker in Congress, Eduardo Cunha, to stay silent while Cunha serves a prison term.
O Globo said there were recordings of conversations between the two in which the alleged bribe occurred.
The news comes as Brazil is already suffering through record-high unemployment and its worst recession in history.
The country has been embroiled in an infamous bribery scandal for over three years known as Operation Car Wash and involving its biggest company Petrobras. It has entangled the past two presidents, all political parties and imprisoned billionaires.
Related: Brazil's spoiled meat scandal widens
The political turmoil in Brazil also comes after US markets were also rattled by political upheaval in President Trump's White House.
Temer's office has denied the latest allegations.
"President Michel Temer never requested any payments be made to former congressman Eduardo Cunha in exchange for his silence," according to a statement from the presidential palace.
Fears of a market plunge were so severe that Brazil's central bank issued a statement before markets opened, saying it would do everything possible to keep markets functioning on Thursday.
Investors had hoped that Temer, a business-friendly president, would bring major economic reforms to Brazil. Top of Temer's list was a pension reform proposal.
Related: Brazil's worst recession
Amid these allegations, investors are losing hope that any reforms will get passed that could help Brazil recover from its historic recession, which was largely caused by the widespread corruption scandal.
"The latest developments will severely eat into the government's political capital," said Edward Glossop, an economist at Capital Economics, a research firm. The allegations "dealt a fresh blow to the government's reform agenda."
The allegations would also raise the prospect of potential impeachment for Temer, who served as vice president under former President President Dilma Rousseff.
Rousseff was impeached for manipulating Brazil's budget. The impeachment effort against her was led by Cunha and Temer, among other Brazilian leaders.
--Flora Charner contributed reporting from Rio de Janeiro
