The Australian sharemarket retreated from a four-and-a-half year high before last-minute budget talks at the White House aimed at avoiding $US85 billion of automatic spending cuts, the so-called sequester, due to start taking effect today in the absence of a deal with Congress.
In Asia, data showed Chinese manufacturing weakened slightly in February, potentially renewing concern about momentum in Australia's biggest trading partner.
Investors were wary of any negative reaction to the sequester, which the Congressional Budget Office expects to subtract 0.6 per cent from the US economy this year.
The benchmark S&P/ASX 200 closed down 0.4 per cent at 5086.1 after surging 1.3 per cent Thursday to its highest point since September 2008. The index was up 28 per cent since June, and 9.4 per cent this year.
Resources weighed on the market, with BHP Billiton, Woodside Petroleum, Rio Tinto, Newcrest and Fortescue Metals down 0.6 per cent-4.0 per cent after commodity price falls added to concern about a late reversal of strength on Wall Street.
The S&P 500 reversed a 0.6 per cent intraday rise, and copper, oil and gold fell as the US dollar rose on the back of stronger-than-expected US manufacturing data.
"Portfolio rebalancing contributed to Australian share market strength yesterday and we are now seeing some caution before the US sequester, although a last-minute deal can't be ruled out," said IG market strategist Stan Shamu.
President Barack Obama and congressional leaders were scheduled to meet later today.
"That probably suggests there's some hope they will knock up a last ditch deal in typical US government fashion," Mr. Shamu said. "But the looming sequester does warrant some caution in Australian equities, particularly after the big run this year. If we don't get a deal, it could be a source of a near-term correction."
Westfield Retail Trust shares fell 4.1 per cent after the Lowy family sold its stake in the real estate investment trust for $663.7 million yesterday.
Major banks outperformed, as J.P. Morgan upgraded Commonwealth Bank, ANZ Bank, and National Australia Bank. CBA, Westpac and NAB rose 0.7 per cent-0.9 per cent.
Elsewhere in the financial sector, QBE Insurance jumped 2.2 per cent. Traders said US hedge funds were covering short positions after QBE unveiled a turnaround strategy in its 2012 results this week.
Ten Network surged 9.1 per cent after reports said Seven Group chairman and billionaire Kerry Stokes had accumulated just under 5 per cent of the free-to-air broadcaster.
Harvey Norman jumped 4.8 per cent after several analysts upgraded their ratings on the electronics, white goods and furniture retailer to Neutral from Sell following yesterday's comments from Harvey Norman management that sales were picking up and aggressive discounting had stabilised.
