The S&P/ASX200 pared an almost 169-point nosedive to end Thursday 92 points lower, down 1.03 per cent to 8,819.4, as the broader All Ordinaries lost 94.6 points, or 1.04 per cent, to 9,008.3.
Brent crude eased after surging to almost $US102 a barrel on US-Iran conflict escalation, after the two nations ramped up attacks on oil tankers.
Liquidity also exited the market as traders de-risked ahead of key US inflation data due overnight on Thursday and Friday.
Closer to home, interest rate expectations continued to rise, with markets now putting a September hike at a more than three-in-four chance.
Meanwhile, the Australian 10-year bond yield and the three-month Bank Bill Swap Rate - a benchmark interest rate used for Australian business loans - hit multi-year highs.
"The BBSW is at 4.6248 per cent - it's really the highest now since late 2011," Pepperstone head of research Chris Weston told AAP.
"If banks are reining in credit and taking on less risk in the economy whilst their reference rate is higher, business loans are going to pull back, and it's going to be more expensive for people.
"And of course, this plays into banks' margins as well."
The financials sector fell 0.9 per cent as the big four banks and Macquarie sold off, while insurers IAG and Suncorp staged afternoon comebacks.
Miners weighed heavily on the bourse, with basic materials dropping 1.6 per cent in a broad-based sell-off.
BHP and Rio Tinto each fell more than 1.7 per cent, despite copper trading at record highs, while Iron ore futures slipped below $US100 a tonne after China's August ore imports topped expectations.
Gold miners were under pressure despite the commodity's spot price inching higher to $US4,426 ($A6,134) an ounce.
Australia's technology sector underperformed, tumbling 1.7 per cent while industrials, consumer-facing stocks and real estate trusts also suffered.
In company news, Droneshield has appointed former MYOB and Afterpay finance chief Rebecca Lowde as chief financial officer.Â
Breville shares fell more than one per cent after going ex-dividend, with the sell-off including $4.3 million in stock offloaded by chief executive Jim Clayton.
WiseTech, Cleanaway and Carsales.com.au owner CAR Group's shareholder payout cut-off is on Friday.
The Australian dollar is buying 72.16 US cents, down from 72.33 US cents on Wednesday at 5pm.
ON THE ASX:
* The S&P/ASX200 fell 92 points, or 1.03 per cent, to 8,819.
* The broader All Ordinaries lost 94.6 points, or 1.04 per cent, to 9,008.3
One Australian dollar trades for:
* 72.16 US cents, from 72.33 US cents at 5pm AEST on Wednesday
* 110.71 Japanese yen, from 110.89 Japanese yen
* 61.99 euro cents, from 62.14 euro cents
* 53.22 British pence, from 53.34 pence
* 123.23 NZ cents, from 123.42 NZ cents
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