The benchmark S&P/ASX200 index had been down by as much as 1.5 per cent before lunchtime but turned things around on Friday afternoon to close down just 43.3 points, or 0.56 per cent, at 7,670.3.
The broader All Ordinaries dropped 47.8 points, or 0.6 per cent, to 7,926.2.
For the week the ASX200 lost 2.25 per cent, its worst week since a 2.89 per cent drop from September 18-22, 2023.
AMP chief economist Shane Oliver attributed the drop in part to a major broker doubling down on a sell recommendation on Australian banks, as well as resources shares falling on the back of a decline in iron ore prices.
After a run of strong gains, with Australian shares up 16 per cent from October, the market remains vulnerable to a correction or period of consolidation, Dr Oliver wrote.
Friday's losses came after the US Labor Department reported overnight producer prices rose 0.6 per cent in February, double the forecast rate and its increase for January.
The US Commerce Department said retail sales rebounded less than expected in February, calling into question optimistic predictions the world's largest economy was on track for a so-called "soft landing".
"It does sort of point to a few different sort of cracks in the US macro picture where you've got consumers potentially slowing down a little bit," NAB market analyst Kenneth Crompton said.
The future market's implied odds that the Fed will cut rates by its June 12 meeting has dropped to 60 per cent, from nearly 75 per cent a week ago, according to the CME FedWatch Tool.
Domestically, the Reserve Bank is overwhelmingly expected to leave rates on hold when it meets on Tuesday in a busy week for central bank decisions.
Eight of the ASX's 11 sectors finished lower on Friday, with energy, utilities and property gaining ground.
The heavyweight mining sector was the biggest loser, closing down 1.9 per cent.
BHP fell 1.5 per cent to $42.41, Fortescue retreated 2.3 per cent to $23.96 and Rio Tinto declined 1.9 per cent to $116.95.
The Big Four banks were mixed, with NAB finishing up 0.9 per cent to $33.81 and ANZ basically flat at $28.69. Westpac declined 1.1 per cent to $26.19 and CBA dropped 0.6 per cent to $115.54.
In the consumer discretionary sector, Tabcorp fell 5.2 per cent to a two-week low of 72.5c after the wagering company announced on Thursday evening that chief executive Adam Rytenskild would step down after using offensive language in the workplace.
"I don't recall making the alleged comment and it's not language I would usually use, but I have regrettably agreed to resign," Mr Rytenskild was quoted as saying in Tabcorp's announcement announcing his departure.
In the energy sector, Woodside climbed 2.5 per cent and Santos added 2.4 per cent amid a flurry of Ukrainian attacks on Russian oil refineries.
The Australian dollar had dropped to a week and a half low against the greenback, buying 65.57 US cents, from 66.15 US cents at Thursday's ASX close.
Next week in addition to a RBA meeting, the Australian Bureau of Statistics will release February labour market data on Thursday.
ON THE ASX:
* The benchmark S&P/ASX200 index finished Friday down 43.3 points, or 0.56 per cent, to 7,670.3
* The broader All Ordinaries dropped 47.8 points, or 0.6 per cent, to 7,926.2.
CURRENCY SNAPSHOT:
One Australian dollar buys:
* 65.67 US cents, from 66.15 US cents at Thursday's ASX close
* 97.39 Japanese yen, from 97.84 yen
* 60.38 Euro cents, from 60.46 Euro cents
* 51.56 British pence, from 51.71 pence
* 107.68 NZ cents, from 107.40 NZ cents
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