The S&P/ASX200 fell 99.6 points on Thursday, down 1.13 per cent to 8,686.1, as the broader All Ordinaries lost 100.3 points, or 1.11 per cent, to 8,916.9.
Investors retreated to safety, bolstering defensive sectors such as health care, utilities and consumer staples.
Energy stocks also advanced as ongoing US-Iran tensions kept oil prices supported after three sessions of gains, despite a potential ceasefire between Israel and Hezbollah.
Headlines from the Middle East were potentially losing their ability to move markets with so many false starts, according to Justin Lin, investment strategist at Global X ETFs.
"For investors, the more important question may now be whether cracks are beginning to emerge in semiconductors, the market's last major pocket of earnings certainty," Mr Lin said.
"If that pillar starts to weaken, sentiment could deteriorate quickly."
The US has also threatened new 12.5 per cent tariffs on 60 economies, accusing trade partners of failing to tackle forced labour, after previous "Liberation Day" tariffs were struck down as illegal by the US Supreme Court in February.
Miners weighed heavily, with basic materials tumbling more than three per cent as iron ore futures, gold and copper prices lost ground.
The drop in iron ore futures came as exports from Guinea's Simandou mine, part-owned by Rio Tinto, surged in May.
Large caps were under pressure in cyclical and other non-defensive sectors, with the big banks, Telstra, Goodman Group, BHP, and Wesfarmers all dragging on the market.
In company news, Penfolds owner Treasury Wine Estates soared 13 per cent higher after flagging plans to condense its US brand portfolio.
Booze and hotel giant Endeavour gained almost four per cent to $2.98 after Citi upgraded the group to a "buy" and increased its target price to $3.25 a share.
Bitcoin slumped to a four-month low of about $US64,000 ($A89,714) after Strategy (formerly MicroStrategy), one of the world's biggest and staunchest holders of the cryptocurrency, sold 35 coins according to a recent filing.
Changes to negative gearing, capital gains tax and discretionary trusts have passed the federal parliament's lower house.
The changes - which have been controversial in the investment and small business community - need crossbench support to pass the Senate.
The Australian dollar is buying 71.35 US cents, down from 71.59 US cents on Wednesday at 5pm.
ON THE ASX:
* The S&P/ASX200 lost 99.6 points, or 1.13 per cent, to 8,686.1
* The broader All Ordinaries improved by 100.3 points, or 1.11 per cent, to 8,916.9
One Australian dollar trades for:
* 71.35 US cents, from 71.59 US cents at 5pm AEST on Wednesday
* 114.09 Japanese yen, from 114.54 Japanese yen
* 61.46 euro cents, from 61.64 euro cents
* 53.14 British pence, from 53.23 British pence
* 121.55 NZ cents, from 121.31 NZ cents
11°C