THE sharemarket ended a horror week in which investors' worries about Europe's finances and a slowing Chinese economy took the monthly loss to about $110 billion.
The benchmark S&P/ASX 200 Index lost 2.7 per cent on the day and 5.6 per cent for the week, the worst five-day return since late September.
It shed 110.9 points for the day the highest this year to end at 4046.5, its weakest close in almost six months.
The dollar also touched new lows for the year, sinking to US97.95? at one point. Interest rate futures markets are now rating the chance of another 50-basis-point rate cut by the Reserve Bank when it meets on June 6 at 75 per cent.
Investors are also pricing in another 125 basis points in cuts for the cash rate in one year. If this eventuates the cash rate would drop to just 2.5 per cent, half a percentage point below its lowest point during the global financial crisis.
IG Markets analyst Stan Shamu said the market was already pricing for a worst-case scenario in Europe and it was hard to make predictions. "People are now scared that we will get a lot of contagion from Greece and Spain and the situation will end very badly," he said.
The week began with the news that Greece had failed to form a government and will hold elections on June 17. The prospect of weeks of doubt about whether a new government will emerge, and whether it will back the European Union's austerity package, is likely to dog markets for weeks.
In the meantime, investors have already begun looking for the next European debt domino to fall, with Spain the most likely candidate.
With more signs of a slowing China, confidence that Australia's reliance on Asia will shield it from another European crisis is evaporating.
Big broking houses, including Goldman Sachs, are cutting growth targets for China for the year. China's home prices in cities fell last month and car dealers' inventory levels foreshadowed deeper price cuts the latest in a string of bad news.
Australian Stock Report head of research Geoff Saffer said worries about China will continue to affect the market.
"We expect the Chinese story to continue as an overhang to the Australian market for some time," he said. "Until China implements wide-ranging stimulus measures we expect fears about a slowdown to continue. The short-term outlook is probably still bearish."
Miners have borne the brunt of the falls. BHP Billiton lost $1.31, or 4 per cent, to $31.46, and Rio Tinto slumped $2.96, or 5.1 per cent, to $55.20 on the day.
Among big banks, National Australia Bank sagged $1.03 to $23.32, Westpac shed 81? to $20.41, ANZ lost 73? to $20.84, and Commonwealth Bank fell $1.62 at $49.40.
Woolworths and Wesfarmers lost 1 per cent to $26.68 to be among the better performers of the top 50 stocks on the day, while Wesfarmers lost 2.1 per cent to $29.55. Telstra fell 1.7 per cent to $3.52.