THE Australian share market slumped 2.4 per cent to close at a three-month low as investors worried they had been overly optimistic about the pace of the global economic recovery. 

The decline in the All Ordinaries, the biggest percentage fall since November 27, was equivalent to losing $30.7 billion in value, as 44 of the largest 50 stocks fell.

The benchmark S&P/ASX200 index fell 107.3 points, or 2.32 per cent, to close at 4514.3, while the broader All Ordinaries index lost 111.4 points, or 2.4 per cent, to 4532.7, the lowest since November 5.

On the Sydney Futures Exchange, the March share price index contract lost 117 points lower at 4475.

"This is broad based and everywhere has had a sell-off because of worldwide sentiment," Bell Financial Group senior adviser Chris Kimber said.

"US unemployment isn't getting better as soon as expected and in Europe they're wondering who's going to be the next one."

Investors sent US and European stocks and commodity prices tumbling on reports of rising debt levels in European nations and an unexpected jump in the number of Americans filing for unemployment benefits.

Mr Kimber said the correction was a fantastic buying opportunity.

"I've been buying today in the top 50," he said.

He said he hadn't seen many selling orders at his firm, suggesting it was overseas fund managers and institutions that were getting out of Australian stocks.

BHP Billiton, the biggest stock on the local exchange, fell $1.44, or 3.51 per cent, to $39.55 and mining giant Rio Tinto slumped $3.52, or 5.02 per cent, to $66.60. Fortescue Metals dropped 26 cents, or 5.45 per cent, to $4.51.

Most other miners also declined after metals prices dropped overnight.

That included the gold miners, with Lihir falling 12 cents, or 4.2 per cent, to $2.74 and Newcrest losing 82 cents, or 2.56 per cent, to $31.15.

The spot price of gold closed locally at $US1064.45 per fine ounce, down $US43.65 on Thursday's close of $US1108.10.

Energy stocks slumped after the price of oil fell on the dismal US jobs news and a lower than expected draw down on natural gas supplies dimmed hopes for stronger energy demand.

Woodside Petroleum fell $1.68, or 3.89 per cent, to $41.52, Oil Search dropped 29 cents, or 5.32 per cent, to $5.16 and Santos slipped 56 cents to $13.20.

Mr Kimber said the Reserve Bank of Australia's quarterly statement on monetary policy reminded people that interest rates would keep rising this year.

"They basically said they would have rates at 4.5 per cent by the end of the year," he said.

The RBA warned in its statement that interest rates may rise further as it modestly upgraded its core inflation forecasts for this year and 2011.

Westfield was the worst performer on the day among the top 50, dropping 74 cents, or 5.72 per cent, to $12.20 after going ex-dividend, followed by Macquarie Group, which lost $2.98, or 5.6 per cent, to $50.23.

Bucking the trend were some healthcare stocks, with CSL rising 43 cents to $31.55.

Electronics and homewares retailer Harvey Norman fell 10 cents, or 2.69 per cent, to $3.62 after it reaffirmed guidance for a big lift in first-half profit after reporting a four per cent increase in sales for the same period.

Market turnover was 3.2 billion shares worth $6.23 billion.

Meanwhile, the Australian dollar closed at a four-month-low on Friday as concerns about sovereign debt in several European nations dampened demand for high-yielding assets.

At 1700 AEDT, the Australian dollar was trading at $US0.8668/72, down 1.63 per cent from Thursday's close of $US0.8813/15.

From 0700 AEDT, the local unit had traded between $US0.8643 and $US0.8694.

It was the lowest close for the Australian currency since September 28 last year when it ended at $US0.8642/44.
Global financial markets slumped on increasing doubts about the ability of the governments in Greece, Spain and Portugal to repay their debts.

US equities closed weaker, with the Dow Jones Industrial Average down 2.61 on Thursday.

The local sharemarket followed suit, with Australia's broad based All Ordinaries index closing down 2.4 per cent to end at a three-month low.

Royal Bank of Scotland foreign exchange strategist Greg Gibbs said investor sentiment to risk weakened on fears about sovereign debts.

"It broke down significantly overnight during US trading," Mr Gibbs said.

"Sovereign risk concerns were probably at the forefront in the market's mind.

"A US dollar rebound generally filtered through to commodity prices, and triggering a need to square up long positions that still exist on the Aussie (dollar)."

Mr Gibbs said the release of the Reserve Bank of Australia's (RBA) quarterly statement on monetary policy did provide the domestic currency with much support.

The RBA upwardly revised most of its inflation and gross domestic product (GDP) growth forecasts, saying domestic demand, the jobs market and business investment were all likely to strengthen.

"The market is more concerned about those global risk factors at the moment," he said.

In the upcoming Friday offshore session, the US Department of Labor is due to release its non-farm payrolls report for January.

Markets have forecast the US economy to add a total of 20,000 jobs in January, from a loss of 85,000 jobs the previous month.

The US unemployment rate is expected to remain at 10 per cent.