(Adds statement from palace, paragraph 16)
BANGKOK, Oct 15 (Reuters) - Thailand's stock market tumbled more than 8 percent and its currency hit a two-week low on Thursday as investors dumped Thai assets in a panic over the health of the country's revered and long-ruling king.
Despite assurances from the palace that the king's health was improving after 26 days in hospital, the stock market suffered its biggest one-day drop since the start of the global financial crisis in October last year.
The head of Thailand's stock exchange urged investors not to panic but acknowledged rumours about the health of 81-year-old King Bhumibol Adulyadej, the world's longest-reigning monarch, had taken a toll on the market.
"The reason we've seen the market drop over the past two days is mainly because of news over his health condition," she said in an interview with Reuters. "Investors should not panic and should trade cautiously during this period of time."
She took to local television airwaves with the same message, urging calm and telling viewers stocks shouldn't fall further.
By the close of trade, stock prices recovered some ground.
Thailand's benchmark index was off about 5.6 percent at 690.4 after touching a six-week low of 670.72, wiping away 10 percent, or $18 billion, of the market's value in two days.
The baht currency, also hit by strong selling, was trading around a two-week low of 33.59 per dollar.
The king's disappearance from public view has raised concern in largely Buddhist Thailand where many of his subjects regard him as almost divine. Most of the country's 67 million people have lived under his 63-year reign.
The health of the king, Thailand's single unifying figure during a long series of military coups and constitutional experiments, is followed closely in financial markets, in part because of concerns about succession.
Bhumibol's son and presumed heir, 57-year-old Crown Prince Vajiralongkorn, does not yet command his father's popular support.
A focus on the issue of royal succession would add another element of uncertainty to a polarising four-year political crisis that has already hurt foreign investment in Southeast Asia's second-biggest economy.
PALACE SAYS HEALTH IMPROVING
A palace official said the king's health was on the mend but he would still need protracted treatment.
"His Majesty's condition is improving and he does not need further medical treatment other than physical therapy which may take a long time," said the official in the Bureau of the Royal Household, who declined to be identified by name.
"Now what he simply needs is exercise to help ease fatigue."
A palace statement released in the evening added he was able to eat more, was taking multi-vitamins and needed more therapy.
The king has been in hospital since Sept. 19 when he was admitted with fever, fatigue and a loss of appetite. On Wednesday the palace said he was recovering from pneumonia.
"Because we don't know what will happen with the king's health, investors want to reduce their exposure," said one senior investment broker who declined to be named, referring to Thailand's stock market.
Thousands of Thais have gathered each day at Siriraj Hospital where he is being treated to sign get-well books for the king or lay garlands in front of a monument of Prince Mahidol of Songkla, the king's father, to pray for a speedy recovery.
"I have been praying every night asking all holy spirits in the universe to help with his quick recovery," said Phakamas Jongkasemwong, 50, from Bangkok's suburb of Bangprakok, as she stood near a large portrait of the king.
"I am extremely relieved to hear that His Majesty is improving, but better still we wish him to recover enough to return to the palace."
The market slide comes at a delicate time as an intractable political crisis shows no signs of abating.
Thousands of red-shirted, anti-government protesters plan to rally on Saturday to demand the government submit a petition backed by 3.5 million people seeking a royal pardon for fugitive ex-premier Thaksin Shinawatra.
They hope clemency by the king would lead to his political return. Though a constitutional monarch seen as above politics, the king's influence over policy is seen as critical. Most analysts, however, doubt a pardon would be granted. ($1=33.51 Baht) (For a Q+A on Thailand's colour-coded protests, click on) (Writing by Jason Szep; Editing by John Chalmers)