Today`s fall was across the board and the biggest one-day drop in percentage and points terms since May 14.
Both major indices closed at their lowest level since May 28.
The drop followed Wall Street`s biggest loss in two months on a bleaker than expected forecast for the global economy by the World Bank.
Resource stocks were among the hardest hit, amid falling commodity prices.
Shares in BHP Billiton finished down $1.45, or 4.11 per cent, to $33.80 and Rio Tinto was $1.39, or 2.78 per cent, weaker at $48.61.
Shaw Stockbroking head of research Tim Buckley said a downgrading in the World Bank`s outlook for global growth this year played a part in spooking investors.
"There was not any obvious catalyst to trigger this other than the World Bank revising downward its growth numbers," Mr Buckley said.
He said the market did not typically take its lead from GDP revisions, but said that coupled with commodity price falls, some investors now feared the recovery may not be as smooth as was thought two weeks ago.
"Markets have a herd mentality and confidence have taken a bit of a hit," Mr Buckley said.
"Stocks have been sold off quite aggressively pretty well across the board. Almost every stock of substance is down today," he said.
On the Sydney Futures Exchange at 1610 AEST, the September share price index contract was down 128 points at 3761 points on a volume of 27,788 contracts.
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