More than $28 billion was wiped from the market's value, as investors followed a negative lead from Wall Street, which had its worst session since June amid concerns about the US economy and emerging markets.
Local stocks were also impacted by the Reserve Bank's decision to leave interest rates unchanged, and its statement that rates would stay stable for some time, CommSec market analyst Steve Daghlian said.
"The market started to pull back even more following that result, the Aussie dollar picked up significantly ... the rate cutting cycle seems pretty much over," he said.
The market's heavyweight industries, banking and mining, fell by 1.7 per cent and 2.2 per cent respectively.
BHP Billiton dropped 94 cents, or 2.6 per cent, to $35.50, Rio Tinto shed $1.23 to $64.11 and Fortescue Metals lost eight cents to $5.19.
National Australia Bank suffered the biggest fall among the banks, dropping 80 cents, or 2.4 per cent, to $32.39, Commonwealth Bank shed $1.20 to $73.20, Westpac lost 59 cents to $30.40 and ANZ was 53 cents lower at $29.30.
One of the rare stocks to buck the trend was REA Group, after the owner of property website realestate.com posted 37 per cent profit growth.
REA shares were the best performer among the top 200 stocks, up $2.08, or five per cent, at $43.78.
KEY FACTS
- The benchmark S&P/ASX200 index dropped 90.8 points, or 1.75 per cent, to 5,097.1.
- The broader All Ordinaries index shed 87.8 points, or 1.69 per cent, to 5,14.1.
- The March share price index futures contract was 95 points lower at 5,050, with 34,839 contracts traded.
-The price of gold in Sydney was $US1,258.70 per fine ounce, up $US13.00 on Monday's closing price of $US1,245.70.
- National turnover was 2.1 billion securities worth $6.3 billion.
