The ruble fell by as much as nearly 2 percent against the dollar on Wednesday, while Russia's RTS Index dropped 4.3 percent, pummeled by low oil prices, a tightening market and geopolitical concerns over Russia's rift with the West over Georgia.

In late-morning trade, the ruble dropped past the landmark 25 against the dollar, falling as low as 25.27 after closing on Tuesday at 24.77. During the course of the day the ruble began to regain ground, stabilizing at about 25.15.

The more liquid, ruble-denominated MICEX dropped 3.2 percent to end the day at 1,324.99 points. The dollar-denominated RTS Index fell to close at 1,589.19, nearly at a 23-month low.

The dollar also made headway on European markets pushing the euro to a seven-month low against the dollar.

In addition to already high geopolitical tensions, investors and analysts pointed to decreasing oil prices, the rising dollar and a tight market in Russia as the primary causes for the ruble's drop Wednesday.

In early afternoon in Kiev, President Viktor Yushchenko pulled his party out of Ukraine's two-party ruling coalition with the party of Prime Minister Yulia Tymoshenko, who has refused to condemn Russian military actions in Georgia. Yushchenko said he might hold snap parliamentary elections as soon as a month from now.

Geopolitics was also on investors' minds as U.S. Vice President Dick Cheney arrived in Azerbaijan on Wednesday on a tour that will also take him to Georgia and Ukraine later in the week. In Baku, Cheney held talks with Azeri President Ilham Aliyev and Western oil majors BP and Chevron, both of whom have strong interests in the Caspian region, and promoted new energy supply routes as alternatives to Russia-controlled pipelines.

Eugene Belin, managing director of fixed income at Citibank in Moscow, said the ruble's fall should be attributed to the strengthening dollar and declining oil prices.

"Oil has fallen quite sharply and people may well be thinking that it will continue to fall," Belin said.

The dollar began rebounding earlier this week as oil fields in the Gulf of Mexico escaped major damage from Hurricane Gustav, pushing oil prices down. In Moscow, the Energy Ministry's announcement of lower-than-expected oil output for August drove Russian energy stocks down even further.

All of Russia's energy majors suffered losses on the MICEX on Wednesday, with Gazprom falling 4.2 percent, LUKoil 3.6 percent and Rosneft 2.8 percent.

Russian banking stocks also fell, after enjoying a boost on Tuesday because of the decline in crude oil prices. VTB lost 3.52 percent and Sberbank dropped by 2.8 percent.

One exception was the regional lender Vozrozhdeniye, which rose 3 percent and enjoyed its fifth consecutive day of gains.

Marina Vlasenko, a senior credit analyst at Commerzbank, said Wednesday's stocks performance was the result of "aggressive speculation on the market," citing the dollar-denominated RTS Index's drop Wednesday.

"Today [there] was a speculative movement downward on the RTS after several days of recovery," she said. "The market is not very liquid, which is why it's very volatile."

Belin of Citibank noted that the Central Bank had let the ruble fluctuate through the day unchecked.

"We are seeing unprecedented volatility in the ruble and the Central Bank did not seem to be intervening on any level, or in any case, not on the level people were expecting," Belin said.

Vlasenko, of Commerzbank, said that in a period of such market volatility, it made sense for the Central Bank not to try to artificially prop up the ruble.

"I think when such sharp movements are happening on the market, [the Central Bank] has decided there's no use spending the reserves for intervention," she said. "Even movements of 10 kopeks are dramatic for the currency market, and today we saw a 30 kopek move."