Losses were felt across most sectors as investors sold out of the big banks, large miners such as BHP Billiton and conglomerate Wesfarmers following another grim forecast for retail spending.

Some brokers warn that markets have not priced in the possibility of the United States defaulting on its debt, but others said they would more likely enjoy a relief rally if the situation was resolved.

"You don't have to be Nostradamus to know what is buffeting the market. There is excellent value there," said Michael Heffernan, senior client adviser at broker Austock.

"I think we will see a rally one way or the other as people are starting to realise if they do default the government is just going to have to stop spending money on something else and pay their debts."

Macquarie Group shares ended 4.6 percent lower as investors reacted with scepticism to the bank's positive full-year outlook, predicting tough markets would weigh on its performance.

The nation's big banks were also hit with Westpac leading declines with a 1.8 percent fall to Aus$20.65.

Shares in Australian retail-to-coal conglomerate Wesfarmers fell 2.4 percent to close at Aus$29.37 after touching a one-year low. It earlier warned shoppers are likely to stay tight-fisted in the next six months, echoing warnings from other top retailers worried about another rate rise in the offing.

One of the few bright spots in the market was travel agency Flight Centre which rose 1.2 percent to close at Aus$22.00 as the strong Australian dollar fuels holiday bookings overseas.

BHP Billiton lost 2.3 percent to close at Aus$42.03, while Rio Tinto fell 1.7 percent to end at Aus$81.20.

The benchmark S&P/ASX200 index closed down 73.6 points to 4,463.8, according to the latest available data, falling for a second straight day.

New Zealand's benchmark NZX 50 index declined 0.6 percent to 3396.788.

Copyright Reuters, 2011