The sharemarket ended the year on a sour note, falling for the first time in four days as the continuing US fiscal policy impasse weighed on market sentiment.
However, the sell-off was limited by improved manufacturing data from China and lingering hope that Republicans and Democrats might still agree on a last-minute deal to avoid the US economy heading over the dreaded fiscal cliff.
"No one knows how this will play out, but the most likely scenario is a patch-up deal to avoid a fiscal catastrophe in the new year," said Stan Shamu, a market strategist at IG Markets in Sydney.
After an abbreviated session yesterday, the benchmark S&P/ASX 200 closed down 0.5 per cent at 4648.9.
For the year, the index was up 14.6 per cent, having gained 3.2 per cent last month, 6 per cent in the fourth quarter and 7.1 per cent in the third quarter.
The index reached an intraday high of 4663.1 after HSBC's final China manufacturing purchasing managers index rose to a 19-month high of 51.5 in December from 50.5 in November. A reading above 50 indicates expansion in manufacturing activity.
Resources stocks BHP Billiton and Rio Tinto both fell 0.8 per cent, while Fortescue Metals rose 0.2 per cent after reversing a 1.9 per cent fall during the day.
Westpac, Telstra and Woodside Petroleum declined between 0.5 per cent and 0.9 per cent.
The benchmark gauge rose 1 per cent last week, led by resources stocks, as a perceived stabilisation in China's economy combined with expectations of more aggressive economic stimulus measures in Japan -- both of which helped push spot iron ore prices up 3 per cent last week.
HSBC's chief economist for China, Qu Hongbin, said China's economic momentum was likely to be sustained in the coming months as infrastructure construction increased to full speed and property market conditions stabilised.
"This, plus Beijing's reiteration of keeping pro-growth policy in place into the coming year, should support a modest growth recovery of around 8.6 per cent year-on-year in 2013, despite the ongoing external headwinds," he said.
IG's Mr Shamu said: "The Australian market is holding up a little better than we expected, and people don't want to price out the possibility of a deal in Washington to break the impasse before year end."
"Should we get a patch-up deal, I see choppy trading in equities early in the new year as people wait for a more concrete solution."
Despite lingering concern over US fiscal policy, Mr Shamu said he expected Australian energy and materials stocks to lead the S&P/ASX 200 to 5000 this year, primarily due to growing confidence in the economy of the country's biggest trading partner, China.
