THE sharemarket slumped to a two-month low after battling headwinds on all fronts yesterday, with Wall Street sharply lower, concerns about Greece's record bond write-off looming and disappointing local economic growth figures weighing on sentiment.
Losses in the local market accelerated towards the close, tracking growing nerves among Asian investors before a deadline for Greece to get support from its private creditors for a debt-reduction deal or face default.
The S&P/ASX 200 Index shed 61 points, or 1.45 per cent, to 4143.7. This marked the third loss in a row, with the broader market down 3 per cent this week.
The fall came after US stocks had their first big stumble of the year, with Wall Street's Dow Jones Industrial Average dropping more than 203 points.
The biggest concern among global investors is a deadline later tonight for Greece's private bondholders to accept a deal to swap their Greek government bonds for new bonds that have a lower face value and interest rate and a 30-year maturity.
The swap is vital for Greece to cut its debt and get a bailout of ?130 billion ($A161 billion) from other countries and the International Monetary Fund. Without the bailout, Greece could default on its debt later this month and rattle markets.
"What the market has factored in about the recovery in Europe has involved a lot of assumptions. And a lot of those assumptions have proved to be somewhat brave at this stage . . . Europe is not resolved," said Matt Sherwood, head of investment market research at Perpetual Investments.
In a further blow to local investors, crucial GDP figures released yesterday showed Australia's economy slowed more than expected in the December quarter, increasing the chances the Reserve Bank will cut interest rates again to bolster demand as annual economic growth hits its slowest pace since the financial crisis.
The economy expanded 0.4 per cent in the quarter, compared with the revised 0.8 per cent for the September quarter, according to the Australian Bureau of Statistics. Economists had tipped growth of 0.8 per cent for the December quarter.
"It was obviously a disappointing starting point for 2012, but if you take a step back from the headlines there is enough happening below the surface to say we are heading for growth in 2012," said Commonwealth Bank chief economist Michael Blythe.
"It's the mining boom that's underpinning that outcome."
For the year, the economy grew 2.3 per cent economists predicted 2.4 per cent. The rate was also slower than the revised 2.6 per cent pace recorded at the end of September. The dollar dropped more than half a US cent on the news, implying a greater chance of more rate cuts to come.
"At this point, GDP is a flag that rates may need to fall further, but we need follow-through in the unemployment rate to be an actionable item," said Matthew Johnson, a senior economist at UBS.
Despite the slowdown, Australia remains among the fastest-growing economies in the world thanks to rising demand for commodities in Asia. The 2.3 per cent annual growth compares with 1.6 per cent in the US, 0.7 per cent in the euro zone and Britain and a 1 per cent contraction for Japan.
But the 2.3 per cent expansion in 2011 was the weakest since 2008. It is also well below the average pace of 3.3 per cent since 1997.
RBA deputy governor Philip Lowe said yesterday that further rate cuts would hinge on the strength of the labour market, a view echoed by economists.
Macquarie senior economist Brian Redican said weakening employment was on the horizon and would likely prompt the RBA to cut again.
"The RBA will cut when unemployment rises above 5.25 per cent," he said. "We think unemployment will rise in the next couple of months and so expect a rate cut in May."
The jobless rate is now 5.1 per cent, with a consensus of analysts expecting it to hit 5.2 per cent when the numbers are updated today.
Dr Lowe said the Australian economy had been undergoing structural change for many years not just since the recent appreciation in the Australian dollar.
In local shares, all sectors ended in the red, but mining stocks once again led the losses as investors re-evaluated demand for resources after China lowered its growth target this week.
Market heavyweight BHP Billiton fell 53?, or 1.5 per cent, to $34.05, plumbing a new low for the year. Rio Tinto backtracked $1.20, or 1.9 per cent, to $62.42 after announcing it would close its Lynemouth aluminium smelter in England.
The big four banks were all weaker.