South Korean stocks dropped 1.06 percent on Friday as investors opted to lock in recent gains following a sharp rally for the past two sessions, analysts said.

The local currency gained ground against the U.S. dollar.

The benchmark Korea Composite Stock Price Index lost 20.74 points to 1,941.37, snapping its two-session bullish run.

Trading volume was slim at 495.3 million shares worth 4.59 trillion won ($3.87 billion), with gainers closely beating decliners at 418 to 381.  

"During the two previous sessions, the index soared nearly 4.5 percent," said Kim Hak-kyun, a senior market analyst at Daewoo Securities Co. "After the recent rally, the market was dominated by profit taking." He said investors also took a cautious stance ahead of the U.S. Fed's monetary meeting slated for next week.

The market will experience choppy trading until the Fed makes a decision on its key interest rate, according to the analyst.

Foreigners dumped a net 56.4 billion won worth of local shares, extending their selling streak to 27 sessions, while institutions offloaded a net 32.3 billion won.

Shares lost ground across the board, with market heavyweights dinged by foreign and institutional sell-offs.

Market bellwether Samsung Electronics sank 1.68 percent to 1,115,000 won and chipmaker SK hynix slid 2.64 percent to 35,000 won.

State-run utilities firms went south, with Korea Electric Power Corp. skidding 2.44 percent to 48,050 won and Korea Gas Corp. dropping 2.74 percent to 40,750 won.

Top cosmetics firm AmorePacific fell 1.68 percent to 351,000 won and runner-up LG Household & Healthcare lost 1 percent to 795,000 won.

Casino operators finished mixed, with Kangwon Land falling 3.79 percent to 40,600 won and Paradise gaining 0.47 percent to 21,350 won.

The local currency closed at 1,184.5 won against the U.S. dollar, up 9.9 won from Thursday's close.

Bond prices, which move inversely to yields, ended lower. The yield on three-year Treasurys rose 0.5 basis point to 1.655 percent, and the return on the benchmark five-year government bonds gained 1.5 basis points to 1.871 percent. (Yonhap)