As much as $15 billion was wiped off the local market, with goldminers the worst hit after the price of the precious metal continued to fall, while softer than expected Chinese economic growth spooked investors.
Australian investors retreated from gold and other resources stocks amid concerns the tide was turning against the sector.
The slump follows a selloff in gold that started in the US last week and pushed it to $US1453.93 an ounce on Monday, the first time in 20 months that it has been below $US1500.
The S&P/ASX 200 Index lost 45.6 points, 0.9 per cent, to finish at 4967.9, after earlier dipping to 4933.3, the biggest one-day loss for the benchmark since March 18.
Global miners, hit by weaker commodities prices, extended their losses after the downbeat China data. Top miners BHP Billiton and Rio Tinto dropped 3.1 per cent and 3.2 per cent respectively.
Gold miners were also sold off, with Newcrest Mining tumbling 8.2 per cent and Regis Resources 12 per cent while Kingsgate Consolidated slid 15.2 per cent.
Thomas Averill, at Rochford Capital, said gold could recover after the US and other countries confronted Japan over monetary easing at the G20 meeting this week. The Bank of Japan's loose monetary policies have been pushing down the yen and, as a result, gold.
"I think you'll see the Japanese reassure world leaders that their new monetary policy is not designed to deliberately weaken the yen," he said.
"I would say that gold shouldn't lose much more ... after this week, we are predicting a resumption of the yen trade, which supports the gold price."
The sharemarket was also rattled by weaker Chinese GDP data that showed the world's second largest economy slowing.
Chinese government data showed the economy grew by 7.7 per cent in the first quarter, down from 7.9 per cent in the previous quarter. It triggered an immediate reaction in the Australian dollar, which fell more than half a cent to US104.50¢.
"The figures were a genuine surprise," ANZ currency strategist Andrew Salter said.
"It showed that most of the weakness in [China's] GDP came from investment, which is obviously the sector that Australia services most closely," he said.
ANZ commodity strategists said the release of weaker-than-expected US retail sales had helped spark Friday's sell-off in gold. "Sentiment was already fragile from news earlier in the week with the Cyprus central bank to sell more than half of its gold holding," they said.
US investment bank Goldman Sachs put a "sell" on the metal last week, sparking a global sell-off.
Gold has dropped 14 per cent so far this year, after more than a decade of gains, as data showed that the US recovery was gaining traction, prompting increased speculation that the central bank will rein in its stimulus program.
Holdings in exchange-traded products fell at a record pace in the first quarter, and have fallen for the past nine weeks.
"The demise of gold is still at an early stage," Georgette Boele, a commodities strategist at ABN Amro Group, said.
"Other assets will become increasingly more attractive as the growth outlook improves."
Gold has ceased to be the haven for investors after it fell when the euro was close to collapse last year, billionaire investor George Soros said in an interview with the South China Morning Post last week. Mr Soros cut his stake in the SPDR gold fund, an exchange-traded fund, by 55 per cent in the December quarter.
Telstra was four cents higher at $4.65 and major banks finished broadly firmer. The country's biggest lender, Commonwealth Bank of Australia, added 0.7 per cent and National Australia Bank gained 0.5 per cent.
Huw McKay, a senior international economist at Westpac, said the Chinese data had pushed the Australian dollar down by adding to weak global sentiment and the gold price decline.
Shares in Tokyo fell 1.6 per cent as the yen rebounded while stocks in Hong Kong were off as much as 1.2 per cent.