UPDATE 1-Investors sell Malaysia on political uncertainty

(Updates prices, adds downgrade, quotes)

By Mark Bendeich

KUALA LUMPUR, March 10 (Reuters) - Malaysian stocks tumbled to a seven-month low and the local currency skidded on Monday, hurt by political uncertainty after the ruling coalition suffered its heaviest election setback in its 50-year reign. The benchmark Kuala Lumpur Composite Index .KLSE fell as much as 7.6 percent to hit its lowest level since August 2007 in reaction to Saturday's stunning election upset, with stocks linked to the coalition and its favoured tycoons hit badly.

Islamists and leftist opposition parties won control of five of Malaysia's 13 state assemblies and just over a third of federal parliament. The result has led to calls for Prime Minister Abdullah Ahmad Badawi to quit, but he has refused to go.

He was sworn in as leader on Monday morning, but uncertainty continued to surround his future after his predecessor, Mahathir Mohamad, urged him to resign.

The main ruling party called a special executive meeting for 0400 GMT on Monday, but the reason was not immediately clear.

"The political stability of the country becomes a question mark," said Pankaj Kumar, chief investment officer at Kurnia Insurance, who helps manage about $500 million in assets.

Investors have voiced concerns for the future of the coalition's long-term development agenda, which will hinge on the cooperation of the opposition states. The Barisan Nasional coalition has effectively ruled since independence in 1957.

Stocks linked to the federal government, or its favoured tycoons, took the brunt of the damage, with plantation-to-energy group Sime Darby Bhd (SIME.KL: Quote, Profile, Research, Stock Buzz), the market's biggest blue chip, down 9.6 percent at 0258 GMT. Sime was caught by a double-punch of political uncertainty and sliding palm-oil prices.