The benchmark S&P/ASX200 index was down 110.4 points, or 2.36 per cent, at 4574.7 points, while the broader All Ordinaries index had fallen 112.1 points, or 2.39 per cent, to 4575.2 points.
On the Sydney Futures Exchange at 1617 AEDT, the December share price index contract was 117 points lower at 4,575 on a volume of 35,669 contracts.
CommSec chief equities economist Craig James said investors were pulling back after a spate of irrational exuberance earlier this month when the market rose six per cent in the space of eight days.
"That has proved to be unsustainable," Mr James said.
"There's nothing fundamental driving losses today other than the good news has dried up.
"We're seeing declines in nations all around the world from Brazil through to Europe and the US.
"It's basically because investors around the world got a little bit too excited about economic prospects and were pushing shares too far, too fast, and we're paying the price for that exuberance now."
Mr James said the cyclical sectors that had driven growth in recent months, mining and banking, accounted for the heaviest losses as investors flocked to defensive stocks such as CSL, which closed up 44 cents, or 1.4 per cent, at $31.90.
Despite this week's sell off, he said the market was still up 47 per cent from March lows.
ANZ has reported an 11 per cent fall in annual net profit to $2.943 billion and says the Australian market is close to a peak in the bad debt cycle.
ANZ shares were down 50 cents, or 2.14 per cent, at $22.85.
NAB had fallen 78 cents, or 2.61 per cent, at $29.05, Westpac shed 60 cents, or 2.25 per cent, to $26.10 and Commonwealth Bank was down $1.58, or 2.98 per cent, at $51.45.
Making headlines, BT Investment Management says it is optimistic about the financial year as the economy improves, after reporting a "disappointing" 11 per cent decline in annual profit.
Shares in BT Investment Management inched one cent lower to $3.01.
Flight Centre reiterated its annual pre-tax profit guidance and says it is happy with its progress in 2009/10 so far.
Shares in the travel agency chain jumped 61 cents, or 3.72 per cent, to $17.01.
Gold miner Newcrest Mining says the outlook for the precious metal remains positive as worldwide supply tightens, and has pledged to pursue growth through mergers and acquisitions.
Newcrest was down $1.45, or 4.28 per cent, at $32.46.
Lihir Gold says it is on track to meet its full year production guidance after achieving quarterly output targets and boosting reserves by 36 per cent at its flagship Lihir Island operation in Papua New Guinea.
Its shares fell eight cents at $2.98.
Newmont was down 15 cents at $4.57 while China-focused Sino Gold lost 35 cents to $6.38 after saying its expects its full-year production to be at the lower end of guidance.
At 16:24 (AEDT), the spot price of gold in Sydney was $US1,031.70 per fine ounce, down $US7.875 on yesterday's closing price of $US1,039.575.
BHP Billiton sank $1.27, or 3.31 per cent, to $37.13 while fellow mining giant Rio Tinto backtracked $3.12, or 4.87 per cent, to $60.98.
Stocks appear headed to sharply higher openingShares close higher on bank gains
