Fears of eventual US Federal Reserve tapering and "hideous" European data kept a lid on bullish sentiment, leaving the Australian sharemarket in the red.
Following a weak lead from Wall Street last night, the S&P/ASX 200 index closed 14.4 points, or 0.27 per cent, down at 5411.1 points despite some firmer domestic data.
Overnight US stocks fell in late trade as the US dollar surged higher against major currencies following a sharp jump in the Chicago PMI index and a "historical" slump in eurozone inflation that stoked deflation fears.
Eurozone CPI inflation increased just 0.7 per cent year-on-year, well short of the forecast for 1.2 per cent and almost a third of the 2 per cent target, raising the spectre the region was in the grip of a "deflationary debt trap".
"It is now hard to ignore, even for the European Central Bank, what has been obvious to a casual observer for a long time that the downside risks for inflation and thus the risk of deflation is much higher than inflation, and higher than any other country," Royal Bank of Scotland currency strategist Greg Gibbs said.
He said a "meek" ECB would likely do little to offset the problem, but deflation would lead to further deterioration of government finances and thus at some point "reignite the sovereign and financial" crisis. That would "more likely than not" lead to capital flight and a period of decline.
The Australian dollar dropped 0.5Â¢ to a low of US94.50Â¢, before bouncing to US94.80Â¢, while government 10-year yields rose 4.9 points to 4.073 per cent as Fed taper fears were revived.
Reflecting expansion from a severely depressed base, the AiG performance of manufacturing index rose to 53.2 points from 51.7 in October, while producer price inflation leapt to 1.3 per cent quarter-on-quarter from just 0.1 per cent.
It was probably a delayed response to the weaker dollar as fuel and utilities prices jumped.
The Shanghai composite index traded in and out of the red and was up 0.1 per cent at the close of the ASX after the official Chinese manufacturing PMI index rose to 51.4 points from 51.1 points.
In Tokyo the Nikkei index was off 1.1 per cent following a batch of weak earnings reports.
Gold fell $US10 to $US1325 an ounce, copper was little changed at $US7250 a tonne and yesterday spot iron ore bounced 0.6 per cent to $US131.90 a tonne.
IG market analyst Evan Lucas said trading had been uninspiring as the recent bull run comes to an end.
"It’s been a bit of a dull day. It’s not surprising we saw the materials space off and the commodities space got hit pretty hard,” he said.
Little company news and low turnover had contributed to the lacklustre moves.
Mr Lucas said the local market was due for some weakness following a strong run over the past four months.
"Once the banks turn ex-dividend in the next weeks then we’re likely to see some falls,” he said.The big miners continued to lose ground despite a bigger than expected rise in Chinese manufacturing activity, with China’s Purchasing
Managers’ Index rising by a third of a percentage point to 51.4 points in October.
Mr Lucas said the result had largely been priced in.
BHP Billiton dropped 13 cents to $37.53, Rio Tinto lost 45 cents to $63.54 and Fortescue was five cents weaker at $5.16.
Department store David Jones was one of the best performers among the top 200 companies, adding 18 cents, or 6.6 per cent, to $2.90 after quarterly sales rose by 2.1 per cent.
Macquarie Group was another company to post strong gains, adding $2.15, or 4.2 per cent, to $53.10 after its half year profit rose by nearly 40 per cent to $501 million and its dividend was increased.
The big four banks were mixed, with National Australia Bank up 32 cents to $35.63, Westpac up 29 cents to $34.58, but Commonwealth Bank was down 28 cents to $75.80 and ANZ was down 12 cents to $33.72.
The broader All Ordinaries index was down 13.8 points, or 0.25 per cent, at 5,406.5.
The December share price index futures contract was 26 points lower at 5,390, with 25,592 contracts traded.National turnover was 2.1 billion securities worth $3.98 billion.