More than $30 billion has been wiped off the Australian stock market as the bourse slipped back below the key 5,000 point mark.
Investor nerves about weaker commodity prices and the potential fallout from an expected rate hike in the United States drove the market lower from the opening bell.
The losses were widespread, with the big banks and energy stocks among the worst hit, while index heavyweight BHP Billiton sank to a fresh 10-year low of $16.60.
The benchmark S&P/ASX200 index closed more than two per cent lower at 4,928.6 while the broader All Ordinaries shed 1.9 per cent to 4,981.9.
The falls come ahead of the US Federal Reserve's highly anticipated two-day meeting, which is expected to result in an interest rate hike on Thursday morning AEDT.
If the Fed does lift its key interest rate from around near zero, it will be the first increase since 2006.
Some market watchers believe a rate hike could push the US dollar higher, making the Aussie dollar weaker and exports cheaper.
The timing of the Fed decision, coupled with the tanking in commodity prices, comes as trading volumes on the Australian bourse begin to thin out ahead of the Christmas holiday period.
While in previous years lower share volumes have helped the bourse stage a so-called Santa rally, IG market strategist Evan Lucas was doubtful it would happen in 2015.
"This year there are probably too many things going on to see it eventuate, with the Fed result, clearly, being a big one," he said.
But optionsXpress market analyst Ben Le Brun is hopeful there will be a late rally.
"Depending on exactly what we get from the Fed, we could finish with a flurry, that's what I've got my fingers crossed for given we're under 5,000 now," he said.
"It's very finely poised at the moment and it's really difficult to make a call one way or the other because I just don't understand what the US dollar is going to do after the (expected) rate rise."
Mr Lucas predicted the Australian stock market would close below the 5,411 points it finished at on December 31, 2014.
"We may come back to the middle of where we've been bouncing between 5,000 points and 5,350 but we won't break even," Mr Lucas said.
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