The sharemarket closed lower as markets worldwide were spooked by the Dutch Finance Minister's comments over the Cyprus bailout.
Jeroen Dijsselbloem said the bailout deal could be used as a template for future bailouts of other debt-ridden European economies.
Under the deal reached on Monday in Brussels, Cyprus agreed to reduce its oversized banking sector and inflict hefty losses on big depositors in troubled banks to secure the €10 billion bailout.
The bailout allows for most of the funds to be raised by forcing losses on accounts of more than €100,000 in Laiki Bank and Bank of Cyprus, with the rest coming from tax increases and privatisations.
The deal has left depositors elsewhere in the eurozone worried about the security of their money.
OptionsXPress analyst Ben Le Brun said the Cyprus deal had initially been welcomed but also had created some uncertainty.
"There's fear about contagion in the banking space," Mr Le Brun said. "A template has been laid down, even though they [European finance officials] have tried to quell investor nerves with their commentary surrounding it."
On the local market, the benchmark S&P/ASX 200 Index was down 40 points, or 0.8 per cent, at 4950.2 points. The broader All Ordinaries Index was down 36.8 points, or 0.74 per cent, at 4964.7.
In the resources sector, BHP Billiton was 48¢ lower at $32.92, and Rio Tinto lost $1.32 at $56.93.
Sundance Resources was still in a trading halt as the company said its Chinese suitor could not meet a key deadline for the $1.3 billion takeover. Sundance last traded at 21¢ .
Among the big banks, ANZ dipped 39¢ to $28.44, Westpac backtracked 33¢ to $30.68, Commonwealth Bank dumped 69¢ to $68.31, and National Australia Bank slipped 19¢ to $30.66.
Among other stocks, UGL climbed $1.15 to $10.58 after it said it was considering whether to split its engineering and property services operations.
Transfield Services fell 4.5¢ to $1.82 despite winning a contract to install fibre-optic cable in Sydney as part of the $37.4 billion national broadband network.
The spot price of gold in Sydney finished at $US1601.87 an ounce, down $US10.
Meanwhile, the dollar was slightly higher. It was trading at US104.65¢, slightly above Monday's close of US104.55¢.