The S&P/ASX200 dropped 74.1 points on Thursday, down 0.82 per cent, to 8,964.5, as the broader All Ordinaries fell 77 points, or 0.84 per cent, to 9,122.7.
Investor confidence waned as fresh US-Iran strikes sent oil higher, while a Federal Reserve call to hold US interest rates steady left bond investors questioning chair Kevin Warsh's commitment to price stability, as the 30-year Treasury yield soared to a 19-year high of 5.3 per cent.
"What stands out is how quickly the Australian market is swinging between competing inflation signals," Vantage senior market analyst Hebe Chen told AAP.
"Investors celebrated the softer inflation print earlier this week, but rising oil prices and a hawkish Fed have reignited inflation concerns just as quickly, showing how fragile the foundation beneath market confidence remains."
Australian shares would likely remain caught in the weaker global mood as companies headed into earnings season, despite the local exchange having less exposure to an unwinding of recently red-hot technology stocks.
Mining underperformed on Thursday, down 1.6 per cent, while consumer discretionaries also fell sharply as global inflation worries dragged on gold stocks and clouded the retail outlook.
Gold itself fell to $US4,035 ($A5,806) an ounce, the precious metal and non-yielding asset losing some shine.
Rio Tinto and PLS bucked the trend, each carving solid gains on the backs of strong performance updates earlier in the week.
BHP and Fortescue both lost ground as iron ore futures slumped to $US98 a tonne.
Of 11 sectors, only energy and IT stocks ended the session higher, as crude prices lifted Woodside and Santos, while WiseTech rebounded strongly after dip-buyers pounced after it fell to near five-year lows on Wednesday.
Ampol shares handed back most of their early gains despite the company flagging huge earnings growth on the back of the Iran war, after the update wasn't enough to sustain the price at more than two-year highs.
Financials sold off as traders took profits on a roughly seven-week, 12 per cent rally to near all-time highs, with Thursday's selling likely sparked by the US bond market jitters, IG market analyst Tony Sycamore said.
In company news, Domino's Pizza shares soared nine per cent after investors were impressed by the company's balance sheet review and better-than-expected earnings guidance.
Despite Thursday's shaky performance, July was set to be a positive month for Australian stocks.
"With one session left to go, the ASX200 is on track for a fourth consecutive month of gains, up two per cent month-to-date as July once again lives up to its reputation as the best-performing month of the year," Mr Sycamore said.
The Australian dollar is buying 69.54 US cents, from 69.53 US cents on Wednesday at 5pm.
ON THE ASX:
* The S&P/ASX200 dropped 70.9 points, or 0.78 per cent, to 8,967.7
* The broader All Ordinaries advanced 77 points, or 0.84 per cent, to 9,122.7
One Australian dollar trades for:
* 69.54 US cents, from 69.53 US cents at 5pm AEST on Wednesday
* 113.78 Japanese yen, from 113.70 Japanese yen
* 60.75 euro cents, from 61.04 euro cents
* 52.11 British pence, from 52.29 pence
* 119.70 NZ cents, from 120.12 NZ cents
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