MOODY'S downgrades of its debt ratings for Italy, Spain and Portugal combined with a fall in commodity prices to drag the sharemarket down almost 1 per cent yesterday.
The slide wiped out the S&P/ASX 200 Index's Monday gain of 39.8 points, taking it down 42.3 points, or 0.99 per cent, to 4242.8.
All sectors finished lower as investors digested the impact of the downgrades, which included cuts for Slovenia, Slovakia and Malta.
Moody's also placed negative outlooks on France, Britain and Austria, and said Europe's weakening economic prospects threatened the implementation of domestic austerity programs and structural reforms needed for greater competitiveness.
"Those jitters from Moody's comments trickled through our market in the absence of any large, significant, industrials reporting today," said City Index chief market analyst Peter Esho.
"That was enough to see stocks down."
Copper and gold prices fell, and low natural gas prices dragged BHP Billiton lower.
"[The price of gas] continues to slump, and so that's weighing on the price of BHP," Mr Esho said. The stock closed down 49?, or
1.3 per cent, at $36.17, while Rio Tinto fell $1.15 or 1.6 per cent to $69.28.
Oil majors slipped more than 1 per cent, with Woodside Petroleum losing 41?, or 1.2 per cent, to $35.17.
Gold major Newcrest Mining dropped 70?, or 2 per cent, to $34.40.
The spot gold price was down $US10.60 at $US1717.25 an ounce at the close of the Australian session.
Banks and financials stocks were also softer on the eve of the release of Commonwealth Bank's first-half result today.
The market expects CBA to post interim cash earnings of $3.529 billion, roughly flat on its most recent second-half result.
CBA shares lost 33?, or
0.7 per cent, to $49.96 while Westpac led the sector lower and closed down 25?, or
1.2 per cent, at $20.90.
Bright spots were contained to News Corp, which gained 19? to $18.84, and consumer staple Woolworths, which put on 28?, or 1.1 per cent, to $24.99. Coca-Cola Amatil firmed 13? to $11.73.
Building fixtures supplier GWA Group posted a 60 per cent drop in first-half profit, which sent the stock down 17?, or 6.9 per cent, to $2.31.
Tabcorp Holdings fell 15?, or 5.2 per cent, to $2.75 after the wagering and gaming company announced it hoped to raise about
$200 million by issuing new subordinated notes to be listed on the Australian Securities Exchange.