The sharemarket suffered its biggest fall since September 30 after a negative lead from offshore was compounded as investors took profits from bank stocks.
The benchmark S&P/ASX 200 Index lost 73.9 points, or 1.4 per cent, to 5319.2, while the broader All Ordinaries lost 69.3 points, or 1.3 per cent, to 5317.5. Falls in Asian markets also weighed on sentiment.
The market took a lead from Wall Street, which fell after Dallas Federal Reserve head Richard Fisher described the Fed's balance sheet as "bloated" and said "at some point, we will have to taper back on the pace of purchases". His comments increased speculation that US stimulus could be reduced before the end of the year.
"Most of the selling through the day was driven by people taking profits from the big four banks," Wilson Asset Management analyst Martin Hickson said. "It is possible that with so many initial public offerings about to come to market, notably the Nine Network float, that some investors may be freeing up capital to participate in those."
Financial services was the worst-performing sector, down 1.8 per cent. NAB fell the hardest, down 2.5 per cent to $33.65. CBA dropped 2.3 per cent to $76.31, while ANZ shed 2.1 per cent to $31.44 and Westpac lost 1.8 per cent to $32.27. "There is not much capital growth left for the major banks," Katana Asset Management portfolio manager Romano Sala Tenna said.
Energy stocks were also hard hit, with the sector down 1.7 per cent. Woodside Petroleum fell 0.9 per cent to $38.89, while Santos shed 0.9 per cent to $14.72.
Linc Energy was the worst-performing stock, dumping 7.9 per cent to $1.05 before its exclusion from the S&P/ASX 200 at the end of this week.
BHP Billiton fell 1.1 per cent to $37.63 but iron ore producer Fortescue Metals added 2.9 per cent to $5.77. Junior iron ore producer Sundance Resources was the best-performing stock, jumping 9.1 per cent to 12¢.
Rail operator Aurizon Holdings dropped 3.3 per cent to $4.65 as shareholders delivered a first strike on executive pay at the AGM.
Leighton Holdings fell 3.2 per cent to $17.05 as it reported a 65 per cent rise in underlying profits for the nine months to September.
Paint maker DuluxGroup dropped 1.7 per cent at $5.13, despite reporting an 18.2 per cent increase in full-year net profit, beating its half-year guidance. Building materials supplier CSR jumped 8.3 per cent to $2.61 after it reported a 188 per cent rise in half-year net profit.