The benchmark S&P/ASX200 index on Wednesday closed down 78.7 points, or 1.06 per cent, to 7,352.2.
The broader All Ordinaries finished 69.5 points lower, or 0.91 per cent, at 7,559.1.
The drop came after the US Consumer Price Index readout of 6.4 per cent outstripped expectations by 0.2 percentage points.
Wall Street experienced mixed results overnight, with the S&P500 finishing basically flat.
Sell-offs of Australian stocks were compounded after investors reacted negatively to Commonwealth Bank's half-year earnings report.
"There was general disappointment (with the inflation figures) and then the banking sector dragged everything down," Tribeca Alpha Plus portfolio manager Jun Bei Liu told AAP.
"All the big banks were down and they're very big index weights so they dragged it lower."
CBA shares were down 5.7 per cent to $103, despite the bank reporting a nine per cent lift in profit in line with expectations.
Investors were rattled by talk the bank's net interest margin might have peaked, with cost pressures set to rise.
"There's a lot of headwinds to come and that has disappointed a lot of people, so we saw a broad sell-off across all banks," Ms Liu said.
Westpac, NAB and ANZ fell 4.3, 4.1 and 3.8 per cent to $22.83, $30.31 and $24.78 respectively.
NAB will deliver its half-yearly update on Thursday, which will give a good overall insight into how business is tracking, Ms Liu said.
While financials drove the market, falling 3.4 per cent, the rest of the 11 ASX sectors were mixed - five up and five down.
Fortescue Metals slid 0.8 per cent to $22 after announcing a 15 per cent dip in profit and a reduction in dividends.
The other big miners fared better, with BHP up 0.5 per cent to $47.94 and Rio Tinto gaining 1.5 per cent to $123.33.
Penfolds maker Treasury Wine Estates plummeted 6.9 per cent after missing profit expectations, wiping off five weeks' worth of gains.
Also reporting on Wednesday morning was consumer discretionary conglomerate Wesfarmers, which announced a consensus-beating $1.38 billion profit.
Its shares jumped 1.3 per cent to $49.35.
"Wesfarmers' result was very good and they actually said they haven't seen any slowdown," Ms Liu said.
"It's one of those companies people are worried about in the next six months, where if consumer demand does slow down, the likes of Kmart and Bunnings will have to experience some sort of weakness."
Hearing implants manufacturer Cochlear was one of the day's biggest winners, rising 7.8 per cent to $225.28 despite a 16 per cent drop in profits.
Embattled casino operator Star Entertainment recouped some of this week's losses, surging 14.4 per cent to $1.47 after losing 31.5 per cent of its value in the preceding two days.
The Australian dollar was mixed against the major currencies, buying 69.35 US cents compared with 69.72 at Tuesday's ASX close.
ON THE ASX:
* The benchmark S&P/ASX200 index finished Wednesday down 78.7 points, or 1.06 per cent, at 7,352.2.
* The broader All Ordinaries fell 69.5 points, or 0.91 per cent, to 7,559.1.
CURRENCY SNAPSHOT:
One Australian dollar buys:
* 69.35 US cents, from 69.72 US cents at Monday's ASX close
* 92.23 Japanese yen, from 91.85 Japanese yen
* 64.67 Euro cents, from 64.85 Euro cents
* 57.04 British pence, from 57.35 pence
* 110.00 NZ cents, from 109.84 NZ cents.
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