The index started to decline in the second hour of trading and went plunging in the afternoon with nearly 80 points loss at some points, the biggest drop in history.
As some investors picked up falling stocks in the last hour, the index closed 68 points lower.
It is now at the lowest level in nearly eight months.
443 tickers, or 88 percent of all stocks on the main bourse Ho Chi Minh Stock Exchange (HoSE), closed in the red, with 171, or 34 percent of them, hitting the floor.
Trading on the Ho Chi Minh Stock Exchange (HoSE), on which the index is based, fell 11.5 percent to VND21.93 trillion ($954.12 million).
"It is terrible," said Vo Cong Minh, director of retail customers at ACB Securities, as the market plunged.
The Monday plunge came as a surprise to Minh and many experts who had earlier expected a market recovery, signaled by VN-Index rising on Friday with increased trade and foreign investors net buying.
The main reason for the plunge was because of margin calls, he said, referring to the demand of brokerages for additional investment when customers who borrow money to invest see their stocks plunge to a certain level.
Seeing some stocks fall, investors who fear a market plunge started to panic sell and this created a wave of selling in the afternoon, Minh said.
Most analysts did not expect this as brokerages have been calling margin for the last two weeks, but apparently there are still accounts with loans and therefore brokerages have to force them to sell to avoid further loss, he added.
The VN30 basket, comprising the 30 largest capped stocks, saw all tickers losing, with 16 of them hitting the floor.
The biggest losers include BVH of insurance company Bao Viet Holdings, CTG of state-owned lender VietinBank, HPG of steelmaker Hoa Phat Group and MWG of electronics retail chain Mobile World, all dropped 7 percent.
VCB of state-owned lender Vietcombank fell by the smallest amount at 0.5 percent, followed by NVL of real estate developer Novaland Group, down 1.1 percent, and VIC of biggest private conglomerate Vingroup, down 1.9 percent.
Several speculative stocks bucked the trend. FLC of real estate developer FLC, AMD of FLC Stone Mining and Investment and rose by around 2 percent.
Foreign investors continued to bet on the market with a net purchase of VND215 billion, mainly buying SBT of sugar producer Thanh Thanh Cong – Bien Hoa Jsc and VRE of retail real estate arm Vincom Retail.
The HNX-Index for stocks on the Hanoi Stock Exchange, home to mid and small caps, dropped 6.02 percent while the UPCoM-Index for the Unlisted Public Companies Market fell 4.43 percent.