Talks between US President Barack Obama and Congress on Sunday failed to produce an agreement, before the August 2 deadline.
At 1615 AEST on the Australian bourse, the benchmark S&P/ASX200 index was down 72.5 points, or 1.58 per cent, at 4,530.4, while the broader All Ordinaries index was down 70.3 points, or 1.5 per cent, at 4,603.8.
On the ASX 24, the September share price index futures contract was 82 points weaker at 4,505, with 35,879 contracts traded.
All three global ratings agencies have threatened to cut the US's triple A credit rating if an agreement is not reached.
Japan's Nikkei fell 0.85 per cent and Hong Kong's Hang Seng lost 0.86 per cent by 1615 AEST on similar concerns
Ord Minnett investment adviser Francesco De Stradis said despite the local market's strong fundamentals, it sold off on the US debt fears.
He said European sovereign debt issues were no longer at the forefront of investors' minds.
``If they don't decide by (the deadline), you can expect the markets to get a bit more punishing,'' he said.
A market correction of 10 per cent could be on the cards, although ``level heads might prevail prior to that'', he said.
``I would say to investors that having some gold exposure is a good thing.''
Newcrest Mining was the best performer and one of a handful of stocks to make gains today, as the gold price climbed.
Newcrest firmed 36 cents, or 0.82 per cent, to $40.38
The spot price of gold in Sydney was trading at $US1614.30 per fine ounce by 1616 AEST, up $US25.56 from Friday's local close at $US1,588.74.
Among the banks, National Australia Bank was down 59 cents, or 2.34 per cent, at $24.63, Commonwealth Bank lost 98 cents, or 1.94 per cent to $49.54.
ANZ fell 42 cents, or 1.93 per cent, to $21.31 and Westpac declined 34 cents, or 1.57 per cent, to $21.26.
The banks recovered from their intraday lows after the Reserve Bank of Australia said they had little direct exposure to the sovereign debt of the riskiest European countries and were more resilient to any disruption in credit markets.
Market heavyweight BHP Billiton eased 37 cents to $43.06 and Rio Tinto dropped 44 cents to $82.06.
Retailers sank after Premier Investments downgraded its earnings outlook and announced the closure of as many as 50 stores.
Premier's shares slumped 19 cents, or 3.58 per cent, to $5.12.
Preliminary national turnover reached 2.16 billion shares worth $5.13 billion, with 356 stocks up, 755 down and 339 unchanged.
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