THE sharemarket eased half of 1 per cent yesterday after data showed Chinese manufacturing activity had stalled.
The news dampened the enthusiasm from Wednesday's Bank of Japan announcement of a multitrillion-yen expansion to its asset purchase program.
With concerns that Chinese authorities will have to do more to stimulate growth, markets across Asia slipped backwards.
The Australian market slipped back below 4400 points.
The benchmark S&P/ASX 200 Index lost 21.2 points, or 0.48 per cent, to 4397.2.
Energy stocks led the losses, falling 2 per cent, followed by the materials sub-index, which dropped 1.3 per cent.
The flash HSBC China manufacturing purchasing managers index (PMI) provided the first glimpse of September's conditions for Chinese industry.
It ticked up to 47.8, from 47.6 in August for a two-month high pointing to a month in which a slide in activity was halted, but not reversed. A reading below 50 shows the rate of growth of manufacturing activity is slowing.
Following the release of the data, the dollar retreated further from six-month highs. It was trading late yesterday as low as US103.67?.
OptionsXpress analyst Ben Le Brun said the market was lower after having traded in recent sessions at the top of its 18-month range.
"There['s] a bit of profit taking going on," Mr Le Brun said. "The resources, energy and materials space have been hit hardest after not warming to the manufacturing data out of China.
"All eyes are on China now, on what sort of action they're going to take to bolster [the economy]."
Consumer staples and telecoms stocks managed to gain ground, with Telstra up 4? at $3.86, and Woolworths adding 23? to $28.96.
Among the big banks, ANZ jumped 19? to $24.74, NAB traded flat at $25.53, CBA lost 38? to $54.97 and Westpac fell 21? to $24.29.
Risky stocks slipped backwards. Global miner BHP Billiton lost 52?, or 1.5 per cent, to finish at $33.70 after it formally withdrew a proposal for a coalmine development in central Queensland. Rio Tinto was off $1.22, or 2.1 per cent, at $56.58.
Fortescue Metals was down 9? at $3.60, after it agreed to pay $US715 million to Leucadia National over a legal dispute.
Retailer Kathmandu rose 1? to $1.38 despite booking a fall in profit and warning that the tough climate for retailers was "the new normal".
David Jones rebounded thanks to its earnings report from Wednesday, up 9? at $2.35. Billabong fell 10.5?, or 7.3 per cent, to $1.34 after the troubled surfwear retailer said one of two private equity firms interested in taking over the group had withdrawn its offer. With AAP