THE Australian share market closed significantly weaker following its biggest one-day percentage fall in two months.
The benchmark S&P/ASX200 index dropped below the psychologically significant 4600 point mark, falling 103.7 points, or 2.22 per cent, to 4569.6 points.
It was the largest one-day fall for the S&P/ASX200 since November 27 last year, when the index backtracked 2.9 per cent to close at 4597.2 points.
And it was the lowest close since November 5 when the index finished at 4508.
The broader All Ordinaries index shed 100.8 points, or 2.15 per cent, to 4596.9 points.
"There is no doubt the resources sector continues to bear the brunt of the weakness and Chinese domestic demand is what is driving that weakness," CommSec equities analyst Savanth Sebastian said.
Market heavyweight BHP Billiton was down $1.30, or 3.19 per cent, at $39.40.
The mining giant said on Friday that it had approved a $US1.93 billion ($A2.17 billion) expansion of its West Australian iron ore business to lift production capacity to 240 million tonnes per annum in 2013.
Fellow mining giant Rio Tinto backtracked $3.44, or 4.82 per cent, to $68.00.
Mr Sebastian said the local market could begin February in the black on Monday if US economic growth figures on Friday night (AEDT) were positive.
"Anything in the vicinity of 4.5 per cent will bode well for the US economy ... and be ahead of expectations.
"Also, the Chinese lending banks were effectively told to put off lending for January but February is a whole new month."
On the Sydney Futures Exchange, the March share price index futures contract was 101 points lower at 4546 points on volume of 40,142 contracts.
Among major banks, ANZ was down 42 cents at $21.73, Commonwealth Bank slipped $1.87, or 3.39 per cent, to $53.23, Westpac retreated 72 cents, or 2.93 per cent, to $23.86 and National Australia Bank was 32 cents lower at $26.37.
Meanwhile, the Australian dollar closed almost one cent lower as investors shied away from the local currency on European debt fears and rumours the Australian central bank will keep rates on hold.
At 1700 AEDT, the Australian dollar was trading at $US0.8891/95, down 1.3 per cent from yesterday's close of $US0.9009/13.
Between 0700 AEDT and 1700 AEDT today, the local unit traded between $US0.8887 and $US0.8967.
It was the lowest close for the Australian dollar since January 4.
RBC Capital Markets senior economist Su Lin Ong said the local unit came under pressure for much of the day, due to the "whole global risk aversion trade".
"The ongoing concerns about Greece, lingering concerns about China ... you can see all risk barometers are under pressure," she said.
"Everything from equities to barometers like the Aussie dollar."
Fears Greece will default on its debt has raised concerns about the high level of indebtedness in other European nations such as Portugal.
Ms Ong said the local unit suffered during domestic morning trade amidst rumours the Reserve Bank of Australia may not increase official interest rates when its board meets next week.
"That's weighed on the Aussie currency as well, so it's facing a number of headwinds at the moment."
Weak sentiment on equity markets in Asia helped drag the Australian dollar lower in morning trade.
Ms Ong said RBA credit data released today had provided "modest support" to the local currency.
Total credit provided to the private sector by financial intermediaries rose by 0.3 per cent in December, following a 0.1 per cent increase in November, the RBA said on Friday.
"I don't think that was the main driver," Ms Ong said.
"The dominant theme at the moment, despite the key events this week being a shift in FOMC sentiment and stronger data generally, the dominant theme still seems to be risk aversion and as long as that remains the Aussie is going to be under pressure."
Trade in the offshore session would be heavily dependent on the risk theme as markets remained "quite nervous," she said.
"Whether it's justified or not is debatable, but if the risk aversion theme continues to dominate then the Aussie is going to struggle."
