Shares opened lower on Tuesday and fell further after Australia's annual inflation rate rose to 3.5 per cent, based on December quarter data.
The Reserve Bank meets next week to consider rates. Surging inflation has prompted central banks in other parts of the world to raise rates as economies recover from the pandemic.
The Australian dollar had a short-lived jump after the inflation figures were published but returned to trade at about 71 US cents.
The ASX share categories faring worst were energy, financials and property. Each lost almost three per cent.
The benchmark S&P/ASX200 index was down 165.5 points, or 2.31 per cent, to 6974 points at 1200 AEDT.
The All Ordinaries index was lower by 176.3 points, or 2.36 per cent, to 7265.2 points.
US markets closed higher after plenty of selling in recent days ahead of the Federal Reserve policy meeting this week.
The central bank is tipped to raise rates several times this year to slow inflation.
Meanwhile fourth-quarter earnings season is in full swing. US banks have disappointed although most companies have bettered forecasts.
On the ASX, investors were making moves before the market closes on Wednesday for the Australia Day public holiday.
Buy now, pay later provider Zip is talking to rival Sezzle about buying the company.
Sezzle tailors its payments service to higher value purchases and makes money from businesses and consumers.
Both companies said the talks were preliminary.
Sezzle was up 13 per cent to $2.42.
Zip was even at $3.28.
Rio Tinto and its partners in Mongolia have agreed on terms to start work at a $US7 billion copper mine.
First production at the Oyu Tolgoi mine is expected next year after Mongolian government officials made changes to financial terms.
Rio Tinto was down almost one per cent to $106.93.
Fortescue Metals exported more iron ore in its second-quarter than at the same time a year earlier.
This made for record first-half exports.
Fortescue was lower by 3.21 per cent to $19.86.
BHP dropped 1.11 per cent to $45.09.
In banking, ANZ and NAB lost about three per cent. The Commonwealth and Westpac were marginally better.
Department store chain Myer said the coronavirus was affecting store sales this month and staff were focused on online trading.
Total sales for the five months to January 1 were up 12 per cent.
Myer was up four per cent to $3.85.
The Australian dollar was buying 71.57 US cents at 1200 AEDT, lower from 71.77 US cents at Monday's close.