The benchmark S&P/ASX-200 index fell as much as 2.85%, or 141.9 points, to 4837.6 soon after opening.

The market was pulled down by the big miners and the banks.

"It's going to be a blood bath," said Peter Strachan of StockAnalysis before the market opened. "People are just having to liquidate assets."

Currency markets, though, are already painting a grim picture for Australian assets, with the dollar plunging 2.3% to 81.03 US cents this morning, less than two months after it neared parity with the greenback.

"This move in the Australian dollar is absolutely extraordinary - we have not seen anything like it," said Amy Auster, head of ANZ Bank's foreign exchange research. "By all counts, the big move is getting to be overdone now and I do think it should hold above 80 US cents."

Against the Japanese yen, the dollar plummeted to 85.88 its lowest since July 2006, and recently traded at 87.79 yen.

Much of the market mayhem stemmed from Wall Street where US stocks tumbled after rising jobless claims heightened worries the economic slump is worsening.

The Dow Jones Industrial Average and the S&P 500 lost 3% in their longest stretch of losses since January, while the Nasdaq shed 3.2%, according to data from Bloomberg.

"When I saw the reasons for fall in the US, it seemed hard to justify - with jobs down but the services industry index reasonably positive," said Austock senior client adviser Michael Heffernan. "I think there's a lot of sentiment impacting there."

Mr Heffernan cautioned that the fundamentals in the Australian market don't justify a plunge.

"This is a particularly fractious, nervous uncertain year we've had so far and there's increased volatility when the underlying fundamentals say we're not in a recession, inflation is not 10%, unemployment is not 10%," said Mr Heffernan. ``There's no reason for it.''