The Australian sharemarket fell deep into the red as investors feared hardline political attitudes in the US could drive the world’s biggest economy into a technical default on its debt.
The S&P/ASX 200 index traded little changed until lunch time, but stocks dived on low public holiday affected volume to close 46.9 points, or 0.9 per cent, down at 5161.1 points after US Speaker John Boehner said the House could not pass an increase to the US debt ceiling without packaging it with other provisions to reduce government spending.
President Barack Obama has indicated he is not willing to negotiate any other measures with Republicans, such as his pet “Obamacare” health insurance policy, so markets fear the standoff could extended at least until the 11th hour before a sharp market selloff sobers up US leaders.
The Australian dollar was steady at US94.20¢ for most of the day, but government 10-year yields climbed 5.4 points to 4.088 per cent as US 10-years edged up 4 points to 2.63 per cent.
The AiG performance of construction index rose 3.9 points to 47.4 points, indicating along with services and manufacturing, broad swathes of the economy contracted at a slower rate in September.
In Tokyo the Nikkei index fell per cent, while Chinese markets remained closed for a public holiday.
Gold was also steady at $US1313 an ounce while copper was little changed at $US7266 a tonne after gaining 1.2 per cent on Friday.
US leaders have until October 17 to reach agreement on raising the debt ceiling or the Treasury will have no cash to pay interest to bond investors or redeem maturing debt.
Bloomberg reported that in 1979 a technical processing problem led to a delay, but short term interest rates jumped 0.5 per cent and stayed elevated fro months afterwards.
The broader All Ordinaries index was down 45.3 points, or 0.87 per cent, at 5160.6.
On the ASX 24, the December share price index futures contract was 57 points lower at 5148, with 20,378 contracts traded.
IG market analyst Stan Shamu said the latest headlines had rattled investor confidence while three states had a public holiday.
"Everyone now thinks the parties are still quite far apart and this has been quite negative for markets,” Mr Shamu said.
"And with a lot of states out for the holidays it’s removed any real volume going through the market."
Australia’s big four banks led the falls on Monday as credit markets came under threat due to the uncertainty in the US.
"The natural reaction was to sell off financials,” Mr Shamu said.
He said the negativity would remain until certainty returned to the US.Among the major banks, ANZ was down 30 cents at $30.46, while Westpac fell 19 cents to $32.23, Commonwealth Bank lost $1.01 cents to $70.75, and National Australia Bank dropped 41 cents to $34.40.
Global miner BHP Billiton was off 45 cents at $34.68, while Rio Tinto had dropped 47 cents to $60.00.
Blood products and vaccines supplier CSL was 93 cents weaker at $64.11 after it said it expects that settlement of an antitrust class action in the US will reduce its fiscal 2014 net profit by $US39 million ($A41.47 million).
The Labour Day holiday is in NSW, Queensland, South Australia and the ACT.
National turnover was 844.8 million securities worth $2.3 billion.