The sharemarket fell nearly half of 1 per cent as investors took profits after the recent record highs reached by three of the big four banks.
The benchmark S&P/ASX 200 Index dropped 25.9 points, or 0.48 per cent, to 5415.5, while the broader All Ordinaries lost 26.6 points, or 0.49 per cent, to 5410.7.
ANZ continued to hit highs after making a record $6.5 billion cash profit in the year to September, but the rest of the big four lost ground.
Bell Direct equities analyst Julia Lee said investors sold out to book gains made from the recent strong runs posted by Westpac and Commonwealth Bank.
"There's been a bit of profit taking given that we've seen a strong performance by the banks," Ms Lee said.
ANZ gained 39¢, or 1.2 per cent, to $33.63, while NAB finished flat at $36.68, Westpac dropped 1¢ to $34.60 and Commonwealth Bank was 61¢ lower at $76.79.
"Still, it has been a fantastic month of October," Ms Lee said.
The market has risen 3.7 per cent in the month, with two trading days remaining.
Mixed leads from overseas markets also weighed on local shares.
US and European stocks were flat as investors waited for a two-day US Federal Reserve policy meeting, which is expected to maintain the central bank's stimulus program and provide clues about when the program's winding down might begin.
In the resource sector, BHP Billiton fell 26¢ to $37.59, Rio Tinto dropped 97¢ to $63.41 and Fortescue Metals eased 10¢ to $5.32.
The price of gold was $US1353.85 an ounce, up $US2.85.
Bond futures prices rallied after Reserve Bank governor Glenn Stevens said he was not worried about a housing bubble and the local currency would eventually fall.
The bond market was boosted overnight by weak US economic data and got a further shot in the arm from Mr Stevens' comments, Nomura head of macro products Jon Linton said.
"He made it clear he's not yet worried about a housing market bubble and I guess people interpret that as removing one of the barriers to further rate cuts," Mr Linton said.
But the real focus remains on the US, rather than Australia, as the market awaits the Fed's monetary policy decision on Thursday morning, Australian time. AAP