The benchmark S&P/ASX200 index closed down 138.6 points, or 1.95 per cent, to 6965.5, while the broader All Ordinaries dropped 152.4 points, or 2.1 per cent, to 7193.4.
The plunge came after US Federal Reserve chairman Jerome Powell warned the central bank would likely continue raising interest rates in a way that caused "some pain" to US households and businesses.
"These are the unfortunate costs of reducing inflation," Powell said in the highly anticipated policy speech at Jackson Hole, Wyoming. "A failure to restore price stability would mean far greater pain."
His words caused a great deal of pain on Wall Street, where on Friday the S&P500 dropped 3.4 per cent and the Dow Jones fell 3.0 per cent.
That carried over to the ASX on Monday, with every sector in the red. Seven out of the 11 official sectors had retreated by at least 1.5 per cent in the market's worst single-day sell-off since June 30.
"There's plenty of blood in the street today," Ben Le Brun, private client advisor with the Australian Stock Report, told AAP.
"Markets and futures got absolutely crushed. It's not a huge shock, we've had a pretty good run in the past month and a half, so it was never a case that we were completely out of the woods for markets.
"It's a little bit of a reality check for markets I think today."
Monday's release of better-than-expected Australian retail trade figures, showing turnover rose 1.3 per cent in July for its biggest jump in four months, did nothing to help sentiment.
"These data will do nothing to dissuade the RBA from raising interest rates by another 50 basis points at the September meeting," wrote Sean Langcake, head of macroeconomic forecasting for BIS Oxford Economics.
Much of the markets' big moves in the past few months have been driven by anticipation of how expectations about central banks setting interest rates, since higher returns for safe bank deposits make equities look less attractive - especially high risk/high return shares like those in the tech sector.
Tech stocks were the worst hit on Monday, collectively dropping 4.4 per cent as Xero fell 4.8 per cent and Afterpay owner Block retreated 7.8 per cent.
All of Australia's big retail banks were lower, with NAB falling 2.5 per cent to $29.84, ANZ dropping 2.3 per cent to $22.44, Westpac down 1.9 per cent to $21.27 and CBA down 2.1 per cent to $96.28.
The heavyweight mining sector fell 2.4 per cent, with Fortescue Metals down 4.9 per cent to $18.89 despite the iron ore giant announcing a better-than-expected 121 cent per share dividend along with its full-year results.
BHP dropped 1.5 per cent to $42.19, Rio Tinto fell 2.4 per cent to $96.29 and South32 dropped 3.3 per cent to $4.09.
Northern Star was down 1.6 per cent to $7.46 even after announcing a $300 million share buyback to help close its valuation gap relative to its goldminer peers.
Aussie Broadband had plunged by 1.53 per cent to a one-year low of $2.66, despite beating guidance by more than doubling full-year earnings to $39.4m.
On the flip side, A2 Milk was up 10.0 per cent to a five-month high of $5.40 after the Kiwi dairy producer announced double-digit sales growth and an on-market share buyback of up to $NZ150m.
Fast-fashion jeweller Lovisa Holdings and salary packaging company McMillan Shakespeare also defied the sell-off following the release of their earnings reports, rising 6.2 per cent and 11.2 per cent, respectively.
The Australian dollar meanwhile was buying 68.55 US cents, from 69.59 US cents at Friday's close.
ON THE ASX:
* The benchmark S&P/ASX200 index on Monday finished down 136.6 points, or 1.95 per cent, at 6965.5.
* The broader All Ordinaries dropped 152.4 points, or 2.07 per cent, to 7193.4.
CURRENCY SNAPSHOT:
One Australian dollar buys:
* 69.76 US cents, from 69.76 US cents at Friday's close
* 95.16 Japanese yen, from 95.37 yen
* 68.96 Euro cents, from 69.82 cents
* 58.72 British pence, from 59.01 pence
* 112.24 NZ cents, from 112.41 cents.
