The All-Ordinaries Index dropped 40 points to 6,711 and the ASX 200 shed 47 points to close at 6,692.

Continued concern over the U.S. consumer credit market and the Reserve Bank warning that the housing slump will drag down the U.S.economic growth in 2008, triggered the fall.

The top four Australian banks all lost ground with Westpac dropping 2.2 percent to $25.80 and the Commonwealth Bank dropped 42 cents to $52.34.

The big mining companies were up and down all day with BHP Billiton slipping to $41.26 at the close but Rio Tinto was slightly up at $100.96.

The big corporate news was the recommendation from the market watchdog, the Australian Competition and Consumer Commission of a $32 million fine on the Visey company for fixing prices in the cardboard box business with its rival Amcor.

On the foreign exchange, the Australian dollar fell back from a 23 year high to close at 90.09 U.S. cents, 106.4 Japanese yen, 44.13 British pence and 63.34 euro cents.

Oil prices were up, however, with a barrel of West Texas crude reaching a record $86.19 and spot gold fetched $764 an ounce.