By Avinash P and Niket Nishant

June 4 (Reuters) - The rupiah sunk to a fresh all-time low on Thursday, prompting efforts from Indonesia's central bank to stabilize the currency, while the South Korean won KRW= hit its lowest since March 2009 on elevated geopolitical uncertainty.

Most emerging market stocks also fell as investor confidence was rattled by the U.S.-Iran war, which remains an overhang despite ongoing diplomatic efforts to secure a peace deal.

The MSCI index of EM stocks .MSCIEF slipped 1.7% and was on track for its second-straight day of losses, while the EM currencies gauge .MIEM00000CUS declined 0.4%.

The greenback =USD hovered near two-month highs, pressuring most currencies, as a flare-up in the Middle East conflict this week curbed risk appetite.

The Indonesian rupiah IDR= weakened 0.5% against the dollar and breached the 18,000 level for the first time, prompting the country's central bank to intervene to arrest the free fall.

Local stocks .JKSE also fell 1.7% to their lowest level in nearly six years.

Other major markets retreated too, with South Korean .KS11 and Taiwanese .TWII indexes easing from record levels, slipping 1.8% and 1.7% respectively.

The bourses have soared more than 100% and 68%, respectively, in 2026, driven by an eye-popping AI-led rally that has powered the broader MSCI emerging markets stock gauge to record levels.

"While earnings expectations — especially in technology-heavy economies such as the U.S., Taiwan and South Korea — are tilted to the upside on AI spending, the rest of the economy finds itself struggling with higher borrowing costs, supply-chain disruptions (due to the Iran war and trade war) and a weakening economic outlook," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank

South Korean President Lee Jae Myung's ruling Democratic Party swept most major local elections on Wednesday, but the opposition conservative incumbent Oh Se-hoon won another term as Seoul mayor.

In South Asia, India plans to scrap capital gains tax on foreign portfolio investments in government securities, which could help boost such inflows, a source familiar with the matter told.

Local benchmarks .NSEI, .BSESN were flat. Investors look ahead to the Reserve Bank of India's rate decision on Friday. Policymakers are widely expected to keep the rates unchanged.

Turkey's unemployment rate rose 0.1 percentage point month-on-month to 8.2% in April, official data showed.
Local stocks .XU100 fell 1%, while the lira TRYTOM=D4 was flat against the dollar.

South African rand ZAR= appreciated 0.6%, but equities .JTOPI fell 0.5%.

Most currencies in emerging Europe firmed against the euro with the Hungarian Forint EURHUF= adding 0.3%. Equities in Budapest .BUX dipped 0.2%, while Bucharest .BETI was flat.

Lebanon's 10 year bond LBTB10Y=RR yields were unchanged following the announcement of the ceasefire.

Markets in Poland and Brazil will be closed on Thursday for a holiday.

HIGHLIGHTS:

** Goldman lifts MSCI EM target on AI boost, flags Iran deal relief for forex, bonds

** Ghana says Africa debt is 'mispriced' and targets investment-grade rating

** Africa Finance Corp raises record $2 billion syndicated loan

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For TURKISH market report, see .IS

For RUSSIAN market report, see RU/RUB