China's Alibaba Group sold a 3.1 percent stake in Indian digital payments firm Paytm for a total of $125 million through a block deal on Thursday, a source with direct knowledge of the matter told Reuters.

Shares of the company fell as much as 8.8 percent to 528 rupees in afternoon trading, and was last down 5.8 percent as of 3 pm IST.

Alibaba, which held a 6.26 percent stake in Paytm as of end-September, sold the stake at 536.95 rupees apiece, the source, who did not want to be named because he is not authorised to speak to media, said.

Morgan Stanley advised Alibaba on the deal, the source added. Alibaba and Morgan Stanley did not immediately respond to Reuters' requests for comment.

Paytm's stock has risen about 9 percent this year up to last close, after reporting strong preliminary figures for the third quarter. It closed 2022 with a 60 percent loss, despite the company announcing a share buyback in December.

Formally known as One97 Communications, Paytm listed in 2021 after a mega $2.5 billion initial public offer (IPO).

Since then, the stock has plunged around 75% from its IPO offer price as investors started questioning the company's monetization plans amid worries about sky-high valuations of tech companies and fears of a global economic recession.

In November last year, Softbank Group Corp sold a 4.5 percent stake in the e-payments firm worth $200 million. SoftBank had a 17.5 percent stake in Paytm as of Sept 30.