At 10.15am (AEST), the benchmark S&P/ASX200 was down 117.2 points, or 2.45 per cent to 4862.9, while the broader All Ordinaries dropped 117 points, or 2.32 per cent to 4924.9.
The September share price index futures contract was 138 points lower at 4872, on volume of 9600 contracts.
Local banks were under pressure as Lehman, the US's fourth-largest investment bank, was thought to be facing difficulties in efforts to recapitalise through a South Korean suitor.
Locally, Commonwealth Bank of Australia lost 90 cents, or 1.99 per cent to $42.92, while second-largest commercial bank Westpac was off 36 cents, or 1.53 per cent to $23.84.
Third-ranked National Australia Bank gave up 57 cents, or 2.28 per cent to $24.92, while ANZ was down 33 cents, or 1.72 per cent to $17.08.
Westpac takeover target St George dropped 35 cents, or 1.11 per cent to $31.25, while bank and insurer Suncorp-Metway put on two cents to $10.69.
In investment banking, Macquarie Group slid $2.15, or 4.8 per cent to $42.65, while second-tier Babcock & Brown lost ten cents, or 4.22 per cent to $2.27.
BHP Billiton lost $1.87 cents, or 5.19 per cent to $34.18, while takeover target Rio Tinto gave up $5.50, or 5.12 per cent to $102.00.
In the US overnight, the Dow Jones industrial average of 30 blue-chips lost 280.01 points, or 2.43 per cent to 11,230.73, while the broader Standard & Poor's 500 gave up 43.28 points, or 3.41 per cent to 1224.51. The Nasdaq, which carries more recently listed and various tech heavyweights, slid 59.95 points, or 2.64 per cent to 2209.81.
In local news, global resources giant Anglo American will acquire ten per cent of Perth-based Magma Metals to gain access to Magma's Thunder Bay platinum-palladium project in Canada. At 10.27am (AEST), Magma was trading up six cents, or 14.29 per cent to 48 cents.
At 10.28am AEST, Crown had dropped 26 cents, or 2.7 per cent to $9.37, while poker machine developer Aristocrat Leisure Ltd was off 16 cents, or 2.32 per cent to $6.75.
International consumers spent more at McDonald's restaurants in August, with the number-one burger chain surprising with a big rise in global same-store sales.
At 10.29am AEST, Retail Food Group , which owns Donut King and Michel's Patisserie in Australia, was steady at $1.475.
"The market's performance isn't surprising given the Lehman story, which has refocused people's attention on not just good news being likely to come out,'' Nomura Australia equities strategist Eric Betts said.
"There are a lot of financial institutions in a fragile state.
"BHP and Rio Tinto's ADR (American Depository Receipts) were weaker overnight. Oil was off, and people are taking that as a no-win for commodity prices.''
NYMEX light sweet crude slid $US3.17, or 2.9 per cent to $US103.17 last night, despite Hurricane Ike heading into the oil-rich Gulf of Mexico.
At 10.40am AEST, the energy sector was down by 4.32 per cent with Woodside Petroleum down $2.49, or 4.41 per cent to $53.98, Santos down 48 cents, or 2.58 per cent to $18.13, and mid-tier New Guinea producer Oil Search dropping 15 cents, or 2.74 per cent to $5.32.
In other local news, the Westpac-Melbourne Institute consumer sentiment index rose by a seasonally-adjusted 7 per cent in September, following the Reserve Bank's cut to official interest rates.
Seven Network shareholders today approved a $320 million share buyback, a move that could boost chairman Kerry Stokes's voting power to more than 50 per cent. At 10.48am AEST, Seven was trading four cents lower at $8.15, while rival Ten Network was down 3.5 cents, or 2.15 per cent, at $1.59.
Fairfax Media dropped one cent to $2.89, and Consolidated Media lost four cents, or 1.21 per cent to $3.26.
In the heavyweights, News Corporation (the parent company of the publisher of NEWS.com.au) shed 22 cents, or 1.24 per cent to $17.59.
At 10.52am AEST, spot gold in Sydney was trading at $US765.70 an ounce, down $US34.50 on yesterday's close of $US800.20.
In the gold sector, Newcrest Mining fell $1.05, or 4.95 per cent, to $20.15, Newmont fell 29 cents, or 5.95 per cent to $4.58, but Lihir Gold plummeted 15.5 cents, or 7.91 per cent to $1.805.
Anglo Gold Ashanti lost five cents to $5.85.
At 10.55am AEST, the consumer sector was down, too, with Woolworths nine cents lower at $27.66, while Coles and Bunnings owner Wesfarmers was off seven cents at $31.03.
Market turnover was 355.63 million shares, valued at $1.78 billion, with 166 stocks up, 580 down and 232 unchanged.
Builders Doing Their Part to Help Consumers Take Advantage of Tax Credits
Shares edge higher at noon
