The S&P/ASX200 fell 67.2 points by midday, down 0.77 per cent, to 8,634.9, as the broader All Ordinaries lost 69.6 points, or 0.78 per cent, to 8,872.8.
Nine of 11 local sectors were behind by lunchtime, after President Donald Trump said the US ceasefire with Iran was "on life support" after the White House rubbished Tehran's response to a peace proposal.
Closer to home, Australia's big banks were under pressure ahead of Tuesday's night's federal budget, IG market analyst Tony Sycamore said.
"This budget is shaping up to be the most consequential in years, largely due to expected overhauls to negative gearing and capital gains tax," Mr Sycamore said.
"With Australian banks heavily exposed to residential mortgages, any policy changes that result in a sustained fall in property prices could lift mortgage stress and bad debts, putting pressure on bank profitability and their share prices."
Shares in CommBank, NAB and ANZ each tumbled by more than two per cent, while Westpac slipped 1.6 per cent to $36.53.
The heavyweight financials sector was down almost two per cent, as investment managers, insurers and fintechs also fell into the red.
Basic materials offered some counterbalance to the selling, up 2.4 per cent as BHP surged to a record high of $60.23.
Energy stocks and utilities were the only other two sectors trading higher by midday, up 0.1 per cent and 0.6 per cent respectively, as Brent oil futures rose above $US105 a barrel.
Woodside, Santos, AGL and Origin traded higher, while coal producers and uranium stocks dipped.
The health care sector dropped 2.5 per cent, dragged downwards as blood plasma giant CSL bombed to its lowest price since December 2016, shedding almost 19 per cent since Monday's grim trading update.
Consumer-facing stocks were in bad shape, with discretionaries down 2.3 per cent, while staples lost 1.9 per cent in broad-based sell-downs.
IT stocks fared even worse, down 3.6 per cent as tracking app Life360 lost more than a tenth of its value after a mixed first quarter update.
In company news, former market darling Droneshield crashed 15 per cent to three-month lows of $3 after the corporate regulator announced a probe into the defence technology company.
The investigation related to information provided to bourse operator ASX and share trading between 6 and 12 November 2025, which includes when chief executive Oleg Vornik, chair Peter James and director Jethro Marks sold nearly $70 million in Dronshield stock.
The Australian dollar is buying 72.32 US cents, down slightly from 72.38 US cents on Monday at 5pm.
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