The benchmark S&P/ASX 200 has closed down 2.3 per cent at 4980.1, its biggest fall in nine months.
More than $36 billion was wiped from the value of Australian shares in the market's largest one-day decline since May 18, pulling back from the multi-year highs despite broadly positive reaction to earnings reports.
The broader All Ordinaries index fell 225.8 points, or 2.26 per cent, to 4998.6 points.
The falls took the market below the 5000 point barrier it managed to break through on February 12.
The market slipped to 4995 points shortly before 3pm, then continued to slide, settling down 2.1 per cent at 4989.5 points at 3.30pm AEDT.
Investors were spooked by comments in the minutes released early this morning AEDT of the Federal Reserve's January meeting that the US central bank would review its stimulus program next month.
Fed officials also hinted that they were growing uncomfortable with the bank's easy money policies, with the Fed's balance sheet recently passing $US3 trillion in value.
The comments stoked concerns that central-bank policy-tightening moves would reduce the global liquidity that has supported stocks in recent months.
The possibility of tightening also decreases the likelihood of inflation, something that has helped prop up the price of gold.
There was also rumour in the US that a hedge fund had been forced to liquidate metal and oil positions, which put prices under more pressure.
US stocks slumped overnight, with the Dow Jones Industrial Average suffering its sharpest fall since February 4. The DJIA closed down 108.13 points, or 0.8 per cent, to 13,927.54. The Standard & Poor's 500 fell 18.99 points, or 1.2 per cent, to 1511.95, while the Nasdaq Composite Index lost 49.19 points, or 1.5 per cent, to 3164.41.
Investors nerves spread to Asia today, with moves in China to increase property price controls adding to poor sentiment from the Fed minutes to send the Shanghai Composite down 2.7 per cent.
The falls in mainland China had a knock-on effect in Hong Kong, where the Hang Seng Index lost 1.8 per cent.
Credit Agricole strategist Frances Cheung told MarketWatch that Asia investors are concerned that "a smaller-than-anticipated size of the Fed balance sheet ... would imply less funds available to purchase [assets] than what is currently priced in".
In Australia, Richard Coppleson, a senior sales trades at Goldman Sachs, said that today's pullback was "just what a lot of people have been waiting for".
He said the unconfirmed rumour of a commodity fund collapse in the US, plus Federal Reserve minutes that suggested quantitative easing was going to end sooner rather later, had pulled the US market back and Australia followed.
"There's a lot of unsatisfied demand in Australia for stocks because of the low interest rates available, even though a lot of people feel the market's run a bit hard," he said.
"The market's been looking for a catalyst to come off and here it is, but it's probable that a lot of institutions and investors will use this as an opportunity to buy the dips."
Stan Shamu, market strategist at IG Markets, pointed out that a lot of the most violent downward action took place before the Fed's minutes were released.
"Many [were] putting this down to a hedge fund that was on its knees," he said. "Whether there is actually any merit in that or not, there has been no real bounce in markets either way."
Reporting half-year results today, ASX chief executive Elmer Funke Kupper said the rally in local stocks had been fragile and not supported by volume increases.
"Volumes continue to be at cyclical lows and that tells us that the significant rally in the market is a little more fragile than it would appear," Mr Funke Kupper said as he unveiled a 3.3 per cent fall in interim net profit.
"We are looking for there to be more volume to make that (rally) more cemented, and we are not seeing that.
The ASX said the value of shares traded fell 18 per cent to $3.8bn a day in the first six months of the financial year, which coincided with a 15 per cent rally on the stock exchange.
Shares continued to push higher in the first seven weeks of 2013, with a benign reporting season fuelling investor hopes that the economy may be improving.
The S&P/ASX 200 opened 29 points lower today than at its Wednesday close and fell through the day, with a profit warning from energy major Origin Energy and the fall in profit at ASX adding to investor pessimism.
Origin shares fell 8.5 per cent, Santos was down 5.6 per cent and Woodside 3.35 per cent. Amcor fell 4.8 per cent and Newcrest 3.5 per cent. Macquarie Group and BHP Billiton were also lower.
Junior miners suffered more severe falls, with Discovery Metals down 10 per cent, PanAust down 6.9 per cent and Kingsgate losing 7.8 per cent.
The falls outweighed Qantas Airways, which climbed 3.7 per cent after the airline said that its first-half profit more than doubled due to smaller losses on its international division and a one-off gain from the sale of a stake in a freight joint venture.
Insurance Australia Group was another gainer, up 3.2 per cent after reporting first-half profit was three times higher than a year earlier, while asset manager AMP gained 0.6 per cent after its earnings report.
Preliminary national turnover was 1.9 billion securities worth $6.8bn, with falling stocks outnumbering rising stocks by more than three to one.
