At 10.15am (AEST), the benchmark S&P/ASX200 was down 104.1 points, or 2.07 per cent, at 4916.4, while the broader All Ordinaries had fallen 96.7 points, or 1.91 per cent, to 4953.4.
The December share price index futures contract was 59 points lower at 4971, on a volume of 11,188 contracts.
The banking sector led the early losses.
Commonwealth Bank of Australia fell $1.00, or 2.24 per cent, to $43.60, National Australia Bank dropped 77 cents, or 3.17 per cent, to $23.53, while ANZ fell 65 cents, or 3.39 per cent, to $18.50.
Westpac fell 57 cents, or 2.31 per cent, to $24.13 and its takeover target St George Bank lost 50 cents, or 1.59 per cent, to $30.99.
After strong rallies yesterday, Macquarie Group declined $1.90, or 5.03 per cent, to $35.90 and Babcock & Brown fell back 5.5 cents, or 4.47 per cent, to $1.175.
The big miners were also down, with BHP Billiton losing 91 cents, or 2.29 per cent, to $38.79, while takeover target Rio Tinto dropped $2.03, or 1.83 per cent, to $108.97.
On Wall Street overnight the Dow Jones Industrial Average fell 372.75 points, or 3.27 per cent, to 11,015.69.
The Standard & Poor's 500 index shed 47.99 points, or 3.82 per cent, to a close of 1,207.09, while the Nasdaq composite lost 94.92 points, or 4.17 per cent, to 2,178.98.
ABN Amro Morgans private client adviser Bill Bishop said he expected the local bourse to follow the trend set in the US.
"The market is obviously still getting used to the new trading rules, the effect or otherwise of the banning of short selling, and the Dow Jones being down 372 points is the main driver this morning," Mr Bishop said.
"We're going to follow America today, and banks obviously are front and centre in the current environment."
The local energy sector was stronger, after oil prices experienced their biggest one-day jump on record in New York trade to reach $US120.92.
Woodside Petroleum added $1.19, or 2.09 per cent, to $58.19, Santos rose six cents to $18.59, and Oil Search was up six cents, or 1.07 per cent, to $5.68.
At 10.29am (AEST), spot gold in Sydney was trading at $US906.50 an ounce, up $US35.35 on yesterday's close of $US871.15.
Newcrest Mining gained $1.91, or 7.49 per cent, to $27.41, Newmont Mining rose 28 cents, or 5.61 per cent, to $5.27 and Lihir Gold added 18 cents, or 6.79 per cent, to $2.83.
In media, Fairfax Media lost eight cents to $2.90, while Consolidated Media rose three cents to $2.75.
News Corporation fell 61 cents, or 3.71 per cent, to $15.88, while its non-voting scrip dropped 52 cents to $15.69, after the stock went ex-dividend today.
Among the retailers, Harvey Norman gained two cents to $3.52, Woolworths dropped 40 cents to $27.13, Coles owner Wesfarmers plunged 78 cents to $30.97 - also after going ex-dividend - and David Jones lost 18 cents to $4.22.
Shares close 2pc lower
