The benchmark S&P/ASX200 index closed down 132.1 points, or 1.97 per cent, at 6,568.1 on Thursday.
The index lost more than 8 per cent of its value in June alone, with the fiscal year losses climbing to 10.2 per cent.
The broader All Ordinaries fell 131.4 points, or 1.91 per cent, to 6,746.5 on Thursday.
"This month has all been about rising interest rates, concerns about rising inflation and potential recession in the US. This has all received quite a bit of attention and it has dragged the Aussie market into correction territory," CommSec markets analyst Steven Daghlian said.
Those concerns were on display across Asia Pacific after US Federal Reserve chairman Jerome Powell overnight reiterated that the US central bank would focus on controlling persistent inflation, despite the risk that aggressive interest rate hikes could slow the economy too much.
It prompted traders in the local market to trim their holdings in heavyweight mining, energy and financial stocks.
The selling was in part on account of investors updating their portfolios at the tail end of the financial year, Daghlian said.
On Thursday, the energy and mining sectors were the top losers.
Woodside and Santos gave up 3 per cent and 1.6 per cent respectively after oil prices eased, while Beach Energy and Whitehaven Coal slid more than 3.0 per cent each.
Lower iron ore prices and a weakening demand outlook proved to be a drag on the shares of the top miners.
BHP and Rio Tinto dropped more than 3 per cent while Fortescue Metals lost 4.7 per cent.
Gold stocks took a further hit, with Newcrest, Northern Star and Regis Resources falling between 2.5 and 5 per cent.
Financials recorded their worst day in two weeks, with each of the big four banks losing more than 2 per cent of their value. Traders are firming up bets for a hefty rate hike by the Reserve Bank at its board meeting next week.
Data on Thursday showed job vacancies in Australia jumped to all-time highs in the May quarter, indicating the strength of the economy and another sign that rates would likely rise next week.
Healthcare stocks saw some early buying across the board but still ended lower. Cochlear managed to rise 0.4 per cent, but Ansell and CSL closed in the red.
Shares in AGL Energy gave up early gains to close 1.7 per cent lower at $8.25. The country's top power producer said a unit of Canadian investment manager Brookfield Asset Management had acquired a 2.6 per cent stake in the company on June 24.
Meanwhile, the Australian dollar was barely moved, buying 68.79 US cents at 1700 AEST, from 68.82 US cents at Wednesday's close.
ON THE ASX:
* The benchmark S&P/ASX200 index closed down 132.1 points, or 1.97 per cent, at 6,568.1 on Thursday.
* The broader All Ordinaries fell 131.4 points, or 1.91 per cent, to 6,746.5
CURRENCY SNAPSHOT:
One Australian dollar buys:
* 69.82 US cents, from 68.82 US cents at Wednesday's close
* 93.69 Japanese yen, from 93.49 yen
* 65.91 Euro cents, from 65.58 cents
* 56.65 British pence, from 56.49 pence
* 110.68 NZ cents, from 110.37 cents
