The benchmark S&P/ASX200 index on Thursday fell 96.4 points, or 1.2 per cent, in the first nine minutes of trading but then ground higher for most of the day, finishing 34.9 points lower at 7,813.6; a drop of 0.44 per cent.
The broader All Ordinaries fell 35.6 points, or 0.44 per cent, at 8,074.1.
The losses came after the US Bureau of Labor Statistics reported overnight that consumer prices rose 3.5 per cent in the year to March, up from 3.2 per cent in the year to February.
NAB head of market strategy Skye Masters said the readout put to rest hopes that an uptick in US inflation in January and February was simply a "bump in the road" perhaps due to seasonal factors.
"It just really put into doubt expectations the Fed will start cutting in June," Ms Masters said.
Several economists were now predicting the Fed would only cut rates once or twice this year, rather than three as most were forecasting just a few weeks ago.
Market reaction was swift, with US two-year Treasury yields spiking by a quarter of a percentage point, the S&P500 dropping one per cent and the US dollar jumping to a five-month high against a basket of other currencies.
Eight of the ASX's 11 sectors finished lower on Thursday, with energy, materials and consumer staples higher.
The interest-rate-sensitive real estate sector was the biggest loser, dropping 1.8 per cent, with retail property owners particularly hit hard.
Westfield owner Scentre Group retreated 3.0 per cent, shopping centre owner GPT Group fell 3.4 per cent and Vicinity Centres dipped 2.7 per cent.
Westfield shares were among the losers in Thursday's stock market falls. (Paul Braven/AAP PHOTOS)
The consumer discretionary sector fell one per cent, with the prospect of rates staying high for longer expected to impact consumer spending. Wesfarmers dipped 1.1. per cent and JB Hi-Fi fell 0.9 per cent.
The Big Four banks all finished well in the red, with ANZ down 1.4 per cent to $28.96, CBA dropping 1.2 per cent to $116.81, Westpac retreating 1.1 per cent to $26.10 and NAB falling 1.0 per cent to $34.30.
The heavyweight mining sector helped stem the losses, rising 0.6 per cent. BHP climbed 1.1 per cent to $45.94, Rio Tinto added 0.4 per cent to $128.24 and Fortescue edged 0.2 per cent higher at $25.78
Goldminer Northern Star rose 2.4 per cent to a three-and-a-half-year high of $15.36 after advising of higher costs per ounce mined, a metric known as all-in sustaining cost, as well as reaffirming its guidance for gold sold for the year.
"Cost pressures remain prevalent across our sector as well as costs linked to the buoyant gold price," the company said.
But managing director Stuart Tonkin added that the elevated gold price - currently $US2,338 ($A3,584) an ounce - was expected to deliver significant cashflow generation to a miner that already has $174 million net cash.
Netwealth dropped five per cent to $19.26, despite the financial services provider announcing that funds under administration grew by $6.7 billion in the March quarter to $84.7 billion.
Looking ahead, the European Central Bank is expected to leave rates on hold when it meets later on Thursday, Australia time.
The Australian dollar dropped to a 10-day low against its jubilant US counterpart, buying 65.22 US cents, from 66.23 US cents at Wednesday's ASX close.
ON THE ASX:
* The benchmark S&P/ASX200 index on Thursday finished down 34.9 points, or 0.44 per cent, at 7,813.6.
* The broader All Ordinaries dropped 35.6 points, or 0.44 per cent, to 8,074.1
CURRENCY SNAPSHOT:
One Australian dollar buys:
* 65.22 US cents, from 66.23 US cents at Wednesday's ASX close
* 99.89 Japanese yen, from 100.54 yen
* 60.73 Euro cents, from 61.05 Euro cents
* 51.98 British pence, from 52.24 pence
* 108.99 NZ cents, from 109.14 NZ cents
