THE sharemarket fell sharply yesterday, breaking a six-day winning streak, as investors took an interest rate cut from the central bank as a signal the euro zone debt crisis will hurt the local economy.
At the close, the benchmark S&P/ASX 200 Index was down 64.1 points, or 1.5 per cent, at 4257.2.
The Reserve Bank cut the cash rate by 25 basis points to 4.25 per cent, its second successive rate cut in as many months. Dealers said the move was a sign that the contagion from Europe was having a growing effect on Australia's economic health.
"While the European situation is getting a lot of the attention, its impact on China could affect our economy in a big way," Cameron Security client adviser Adrian Leppinus said.
Analysts said separate official data showing falling government spending and strong import growth was likely to trim expectations for September-quarter growth, due in the national accounts today.
"The RBA's obviously seeing signs that things in Europe are coming to our shores," Mr Leppinus said.
The RBA's rate cut came after ratings agency Standard & Poor's said France and Germany, along with 13 other euro zone countries, were at risk of a credit downgrade if they failed to agree on measures to tackle the debt crisis this week.
The news dampened initial market optimism after German Chancellor Angela Merkel and French President Nicolas Sarkozy said they were pushing for a rewrite of the European Union's governing rules to tighten economic co-operation.
Industrial, resources and mining stocks all felt the pinch as sentiment soured.
BHP Billiton fell 55?, or 1.5 per cent, to $36.71, while Rio Tinto lost $1.45, or 2.2 per cent, to $65.55.
Newcrest Mining ended down 4 per cent, or $1.40, at $33.99 after Deutsche Bank downgraded the stock after a landslide halted mining at its Cadia goldmine in New South Wales.
The price of gold in Sydney closed at $US1714.17 an ounce, down $US30.71 from Monday.
Waning investor appetite weighed on energy stocks as oil prices slipped to nearly $US100 a barrel in Asia. Woodside Petroleum fell 71? to $33.48, Santos was down 18? at $13.36 and Oil Search was 7? weaker at $6.48.
Santos reported that its Devil Creek gas processing plant in Western Australia had produced first gas, boosting WA's gas supply by up to 20 per cent.
Among banking stocks, ANZ was down 6? to $20.99, Commonwealth Bank was off 26? at $49.70, Westpac was 23? weaker at $21.46 and National Australia Bank was down 37? at $24.28.