Worries that the strong US economic data, particularly first-quarter gross domestic product due later on Thursday, could see the Federal Reserve lift interest rates sooner than expected also weighed on interest rate sensitive stocks such as the banks.
Together, they drove the benchmark S&P/ASX 200 index down as much as 54.9 points at one stage the biggest decline in 10 months to a five-week low of 3,389.9 .
The index clawed back to finish at 3,401.3, down 43.5 points, or 1.3 per cent, on very active volume of A$3.3 billion ($2.4 billion).
Investors probably feel as though they have been run over by a truck, said Craig James, chief equities economist at CommSec.
Higher Chinese capital requirements that effectively restrict borrowing for some projects such as steel, and comments from Chinese premier Wen Jiabao, who told Reuters very forceful measures were needed to cool its dangerously fast-growing economy, had sparked a sell-off in base metals.
That undermined miners who produce such metals, sending BHP Billiton down to a near three-month low of A$11.49, Rio Tinto to an eight-month low of A$ 31.98 and WMC Resources to a five-month low of A$ 4.61.
Given comments made by the Chinese leadership and all the publicity about slowdown in China, profit-taking has now set in and momentum could carry that for a while, said Hans Kunnen, head of investment market at Colonial First State Fund Manager.
The high expectations of six months ago have gone over the hill. But we still believe in the big picture of global growth and Chinese growth.
Steel makers and other smaller miners were not spared. One Steel fell to a 1- month low of A $2.15, while Jubilee lost 9.0 per cent to near eight-month lows of A $3.15.