The S&P/ASX200 fell 48.6 points, or 0.58 per cent, to 8,295.1, as the broader All Ordinaries lost 55.1 points, or 0.64 per cent, to 8,524.8.
The gloomy start to the week came after ratings agency Moody's downgraded its sovereign credit rating for the United States and as local investors de-risked before the RBA monetary policy announcement on Tuesday.
"I would expect the Moody's downgrade to kind of be the dark shadow over equities this week," said Jessica Amir, market strategist at trading platform Moomoo.
"I think that will probably the case, even if we get a 'Hail Mary' RBA cut tomorrow."
Moody's reduced its sovereign credit rating for the US from AAA to AA1 and downgraded its US outlook from "stable" to "negative".
Nine of 11 local sectors finished in the red, with only telecommunications services (+0.2 per cent) and utilities (+0.3 per cent) eking out minor gains.
Energy stocks and materials weighed heavily on the bourse, down 1.8 per cent and 1.6 per cent respectively.
Oil prices slipped over the weekend as Iran downplayed the likelihood of a nuclear deal with the US, which could have eased sanctions on Iranian crude.
Brent futures were trading at $US64.53 a barrel, down about 1.2 per cent from the same time last week.
Better-than-expected industrial production figures from China weren't enough to stop weakening Iron ore prices from pushing large cap miners lower.
Fortescue sunk 4.9 per cent, while BHP lost 2.4 per cent and Rio Tinto slipped 1.3 per cent.
Gold miners forged a green island in a sea of red, futures contracts for the precious medal bouncing to $US2,231 ($A5,040) after the US credit downgrade.
Lithium miners were among the top 200's worst performers after last week outperforming the market on the back of the US-China trade truce.
Liontown Resources plummeted 16.6 per cent on Monday and Pilbara Minerals fell almost 10 per cent.
Financials finished the day 0.4 per cent weaker, with the Commonwealth Bank the only big four player to close in the green, up one per cent to $171.36.
Macquarie Group fell 3.4 per cent and is down almost seven per cent since it was sued by the corporate regulator last week for allegedly misreporting millions of short-selling transactions.
Interest rate markets are still pointing towards a 25 basis point cut at the Reserve Bank meeting, despite higher-than-expected wage growth and job creation in April.
The Australian dollar is buying 64.12 US cents, down from 64.27 on Friday at 5pm.
ON THE ASX:
* The benchmark S&P/ASX200 index finished Monday 48.6 points lower, down 0.58 per cent to 8,295.1
* The broader All Ordinaries gained 55.1 points, or 0.64 per cent, to 8,524.8
CURRENCY SNAPSHOT:
One Australian dollar buys:
* 64.12 US cents, from 64.27 US cents on Friday at 5pm
* 92.97 Japanese yen, from 93.21 Japanese yen
* 57.20 Euro cents, from 57.30 Euro cents
* 48.13 British pence, from 48.21 pence
* 108.76 NZ cents, from 108.75 NZ cents
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