Thailand's stock market gained 11.2 per cent yesterday, driven by bargain-hunting investors snapping up cheap equities, as Thai economic policymakers sought to dismiss Tuesday's market chaos as the result of a "misunderstanding".

The bounce, a day after the steepest one-day plunge in Thai shares since 1990, followed Bangkok's abrupt retreat from plans to impose a 10 per cent withholding tax on short-term foreign equity investment, a plan intended to ease speculative pressure on the baht. However, foreign investors - who dumped about Bt25 billion (€524 million) of Thai shares in the wave of panic that gripped the market on Tuesday - were net sellers again yesterday, offloading Bt2.8 billion of shares as the market rallied.

In an effort to bolster Thai confidence, the stock market authorities predicted that the equity markets - which saw about Bt773 billion in value wiped out on Tuesday - would soon recover fully. But analysts said foreign investors, in spite of optimism on prospects for the economy and the currency, were likely to remain skittish about the Thai markets in the short term, given that there are worries about erratic policymaking and apparent official indifference towards foreign investors.

"There is definitely long-term damage in terms of perception of a lack of stability and of some unfriendliness towards foreign direct investment," said Ian Gisbourne, head of research at Phatra Securities.

The baht - which has appreciated more than any other Asian currency so far this year - was trading yesterday at about 35.8 to the dollar, down 2 per cent from the 9½-year high on Monday.

The botched attempt by the central bank to gain the upper hand over speculators it has blamed for excessive baht strength has also cast a shadow over finance minister Pridiyathorn Devakula.

He is widely believed to have given his blessing to capital controls that he vigorously defended on Tuesday. But after declaring that the measures would not apply to capital inflows for equity investment, he said: "A lesson has been learnt, but no one needs to be responsible for this."