By 1115 AEST, the benchmark S&P/ASX200 index had lost more than 120 points dropping to 5842.
9 while the All Ordinaries dropped 128 points to 5854.3
VIDEO: Market jitters
In the US, stocks skidded overnight on fresh signs that global credit markets were seizing up, while a lower profit forecast from Wal-Mart Stores Inc renewed worries about consumer spending.
Wal-Mart's pessimistic outlook and subsequent news that a US investment firm wants to halt redemptions further damaged already shaky confidence.
In the latest sign of a deteriorating credit environment,
Sentinel Management Group Inc, which oversees about $US1.6 billion in assets, told clients it wants to stop investors from withdrawing their cash to avoid forced liquidation.
The Dow Jones industrial average tumbled 207.61 points, or 1.57 per cent, to 13,028.92 — its lowest close since April 24.
The Standard & Poor's 500 Index slid 26.38 points, or 1.82 per cent, to 1,426.54, leaving it up just 0.6 per cent for the year.
The S&P 500 hit a lifetime high on July 16 and, on that date, it was up 9.7 per cent for the year.
The Nasdaq Composite Index slumped 43.12 points, or 1.70 per cent, to 2,499.12, closing below the 2,500 mark for the first time since April 13.
Sub-primes woes linger
Earlier ABN Amro Morgans private client adviser Bill Bishop said concerns about the US sub-prime market have taken their toll on the Australian stock market.
"An acceleration in sub-prime woes in America have floated across the Pacific and the financials are being hit," he said.
"Nothing's been left alone. You could really say there have been significant falls across virtually all sectors.
Mr Bishop said that, with the reporting season going well, the slump was sure to end.
"It will finish," he said.
"We've had a volatile market for three or four weeks now and it's probably going to remain that way, but the good stocks are doing well, the reporting season is going well. It's just unfortunately not holding the market up, but that's life," he said.