At the 4.15pm (AEDT) close, the benchmark S&P/ASX200 index had fallen 87.6 points or 2.43 per cent to 3510.4, while the broader All Ordinaries index lost 81.7 points or 2.31 per cent to 3452.5.
CMC Markets senior dealer Matt Lewis said the local bourse followed US markets downwards on the news that a proposed multi-billion-dollar bailout of troubled US car makers may not gain sufficient support.
"Traders continue to remain cautious ahead of any firm outcome in the bailout proposal of the car makers in the US, with overall volumes fairly light coming into the Christmas period,'' Mr Lewis said.
He said some investors were switching their money from the banks into gold stocks which were also benefitting from a strong run in precious metal prices and the weak US dollar.
Mr Lewis said oil stocks also rose after strong gains in the price for crude oil
The resource sector was down, with all the major players taking a hit.
BHP Billiton was down $1.38 at $28.82.
Rio Tinto slumped 9.48 per cent to $36.21 as uncertainty continued to dog the company's rights over a $US6 billion ($8.9 billion) Simandou iron ore project in Guinea that is central to its expansion plans.
Oil and gas producer Santos dipped 33 cents to $14.47 and Woodside Petroleum strengthened 29 cents to $33.06.
Among the major banks, NAB surrendered 25 cents to $19.10, Westpac fell 52 cents to $16.03, the Commonwealth Bank was steady at $28.15.
ANZ lifted 14 cents to $14.56.
Bank of Queensland was $1.00 weaker at $9.25 as an analyst said overseas companies may buy into the fast-growing regional financial institution, taking advantage of the low share price and weak Australian dollar.
Retailers were also down.
Wesfarmers, which owns Coles dropped 45 cents to $15.32.
Woolworths was also down dropping $1.19 to $25.00, as it announced plans plan to join loyalty programs with Qantas.
Qantas was 11 cents lower at $2.24.
In the gold sector Newmont was 16 cents lower at $5.05, Newcrest jumped 80 cents to $28.11 and Lihir found 10 cents at $2.45.
Among media stocks, News Corp (the parent company of the publisher of news.com.au) was 59 cents lower at $12.70.
Fairfax dropped 4 cents to $1.48 and Consolidated Media scraped off 1 cent to $2.00.
The big telco's were also down.
Telstra dipped 1 cent to $4.13 and Optus-owner Singapore Telecommunications lost 2 cents at $2.67.
At 4.24pm the price of gold in Sydney was $US815.30 per fine ounce, up $US1.55 on yesterday's close of $US813.75.
On the Sydney Futures Exchange, the December share price index futures contract was off 58 points at 3529 on a volume of 33,576 according to preliminary calcualtions.
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