The sharemarket continued its fall yesterday, dropping back below 5000 points even though European and US markets brushed off concerns that plans for a deposit tax in Cyprus could reignite the European debt crisis.
The benchmark S&P/ASX 200 closed down 0.6 per cent at a three-week low of 4987.4 points, after rising 0.8 per cent during the day.
Share volume shrank to $5.5 billion, well below the $6.7bn traded on Friday, when the index rose 1.8 per cent.
Consumer staples and healthcare stocks underperformed, with Woolworths, Wesfarmers and CSL down between 1.6 per cent and 2.6 per cent. AMP was another laggard, down 2.9 per cent.
Traders said a US investment bank sold Australian shares for a so-called "transition" order -- the movement of money from one fund manager to another.
Asian markets mostly held their ground, with Japan rising 2 per cent.
"The market is concerned, rather than fearful, over Cyprus, and the concern is pretty low," said James Rosenberg, investment adviser at Macquarie Private Wealth.
"The market is awaiting clarity on the deposit tax in Cyprus, but I just think Cyprus was an excuse for an overdue pullback in equities because the market had run really hard."
The Cypriot parliament was due to debate and vote on the planned deposit tax last night, while banks in Cyprus were due to reopen tomorrow after further bank holidays.
Mr Rosenberg said a further pullback in equities was possible over the next week, but he did not expect a significant fall, as investors still had high levels of cash.
Nader Naeimi of AMP Capital's Multi Asset group said his fund recently booked some profit on the local sharemarket by selling index futures.
Mr Naeimi said the decision was taken because of the extent of share price rises over the past six months, as well as the fact that valuations were less favourable than previously. He said there may be scope for profit-taking in sectors such as financials, consumer staples and healthcare.
The S&P/ASX 200 hit a 4 1/2-year high of 5163.5 last week, having risen 30 per cent since June.
The dollar pushed higher but the gaze of traders remained firmly on whether politicians in Cyprus could reach a deal on the proposed terms of an international bailout package.
At 5pm AEDT, the dollar was buying $US1.038, up US0.2c.
"The main event risk is clearly on the Cyprus vote, which is finely balanced," said Sue Trinh, senior currency strategist at RBC Capital Markets.
Alan Ruskin, global head of G10 FX strategy at Deutsche Bank, said the dollar should hold its ground above parity with the US dollar for the rest of the year.
Although the greenback would probably strengthen as the US economy picked up, Mr Ruskin said a sharp correction in the value of the Aussie was unlikely.
"It's not a negative Aussie dollar story," he said.
Elsewhere, minutes from the Reserve Bank's most recent policy meeting suggested the bank can still cut rates if needed.
"While further reductions may be required, on the information currently to hand it was appropriate to hold rates steady," the RBA said in the minutes of its March 5 policy meeting, where it kept the benchmark cash-rate target at 3 per cent.
