Shares tumble as US debt deadline looms

The S&P/ASX 200 index was down 72.5 points, or 1.58 per cent, at 4530.4, while the All Ordinaries fell 70.3 points, or 1.5 per cent, at 4603.8.

The September share price index futures contract was 82 points weaker at 4505.

Regional markets also lost ground, with the Nikkei in Japan falling 0.85 per cent and the Hang Seng in Hong Kong down 0.86 per cent.

All three global ratings agencies have threatened to cut the US's AAA credit rating if an agreement is not reached.

Talks between the President, Barack Obama, and Congress at the weekend failed to produce an agreement, as the August 2 deadline looms.

An Ord Minnett investment adviser, Francesco De Stradis, said despite the local market's strong fundamentals, it sold off because of the US debt fears.

"If they [US lawmakers] don't decide by [the deadline], you can expect the markets to get a bit more punishing," he said.

A market correction of 10 per cent could be on the cards, although "level heads might prevail", he said.

"I would say to investors that having some gold exposure is a good thing."

Newcrest Mining was the best performer and one of a handful of stocks to gain yesterday as the gold price climbed. The shares rose 36? to $40.38.

The spot price of gold in Sydney was $US1614.30 an ounce, up $US25.56 from the close on Friday.

Among the banks, National Australia Bank fell 59?, or 2.34 per cent, to $24.63. The Commonwealth fell 98? to $49.54, ANZ fell 42? to $21.31, and Westpac fell 34? to $21.26.

Although they were all lower, the big banks recovered from intraday lows after the Reserve Bank said they had little direct exposure to the sovereign debt of the riskiest European countries and were resilient to any disruption in credit markets.

The market heavyweight BHP Billiton fell 37? to $43.06 and its rival Rio Tinto fell 44? to $82.06.

Retailers sank after Premier Investments downgraded its earnings outlook and announced the closure of up to 50 stores. Its shares fell 19?, or 3.58 per cent, to $5.12.