Demonstrators inspired by the revolt that brought down Tunisia's president gathered on Tuesday for a "Day of Wrath" of anti-government protests across the country in which three protesters and one policeman were killed.

Egypt said on Wednesday it was banning demonstrations and quickly dispersed protesters who tried to regroup.

"People are talking about liquidating positions," said Raza Agha, an economist with the Royal Bank of Scotland. "They're getting unnerved. I think the crucial test is today and tomorrow if these things persist, and obviously how the government responds."

"If it responds too aggressively, in a fashion similar to Tunisia, then it's likely it will become a broader thing and people will seek to exit very quickly," Agha said.

Egypt's benchmark stock index tumbled 6.1 percent percent on Wednesday, its biggest one-day drop since Nov. 30, 2009, while the Egyptian pound weakened to 5.8300 to the dollar, its lowest since January 2005.

Foreign treasury bills holdings soared over the last year as investors took advantage of a flood of cheap dollars to buy Egyptian government paper, with T-bills yields of around 9 or 10 percent.

As of November, foreigners held 61.3 billion Egyptian pounds ($10.54 billion) in treasury bills, up from 13.5 billion pounds a year earlier, according to central bank statistics.

A London-based currency dealer said that if traders and portfolio managers were forced to cut positions the pound could come under even greater pressure as they moved their funds out of Egypt.

"It's looking a bit grey at the moment," said the London currency dealer, who asked not to be named. "It's getting a bit out of hand and foreign traders are getting very stressed."

He said that there had been no offers for dollars in the Egyptian pound non-deliverable forwards (NDF) market, nor had there been offers for credit default swaps (CDS).

The cost of insuring Egyptian debt against default rose to a fresh 18-month high on Wednesday on political concerns, with Egypt's five-year CDSs rising 11 basis points to 345 bps, according to Markit.

The foreign purchases of Egyptian securities has helped the government finance its large deficit without crowding private borrowers out of the market. The deficit reached 8.1 percent of gross domestic product in the year to the end of June. Agha said if the government increased it borrowing to expand subsidies, a key demand of protesters, it would have little problem finding finance domestically, but that markets would suffer nonetheless.

"Because the banking system is so large and liquid, it wouldn't be a problem in terms of financing deficits. But it would move prices and it would the move the pound and it would move bonds prices and CDS levels significantly," he said.

"The outflow would happen over a period of time. It depends on the liquidity that currenty exists in the Egyptian market and how people can find a counterparty to extinguish their positions," Agha added. "People are watching the situation very closely."