Australian shares fell 1.6 per cent as resource firms lost ground on weaker metals prices, while an earnings downgrade at GPT Group dented property shares.
Top banks also declined on persistent credit concerns, adding further to pressure on the market.
Analysts said the outlook for equity markets would remain clouded by ongoing concerns about high oil prices, rising inflation and slowing company profits.
"While shares are very oversold and due for at least a short term bounce, they are now hostage to the oil price and it's anyone's guess as to where it will go in the short term," said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors.
Others said investors are likely to remain on edge ahead of the domestic company reporting season which kicks off next month.
"In our upcoming reporting season in August, we will probably see a lot of profit guidance downwards and that's why there is a lot more nervousness," said Lucinda Chan, division director at Macquarie Equities.
The benchmark S&P/ASX 200 index fell 79.6 points to 5,002.5, based on the latest available data, after falling as much as 2.1 per cent earlier in the session.
The index, which is just 33.4 points above its 2008 low hit last Thursday, has now lost 21.1 per cent since the start of the year after rising 11.8 per cent in 2007.
New Zealand's benchmark NZX-50 index fell 1.2 per cent, or 36.47 points, to 3,121.44. The most heavily weighted stock, Telecom Corp of New Zealand , closed down 0.9 per cent at NZ$3.38.
Mining firms declined after the price of industrial metals such as copper, nickel and lead fell in London on Friday.
BHP Billiton Ltd , the world's top miner and Australia's top oil and gas producer, shed 2.3 per cent to $39.75, while its main rival and takeover target, Rio Tinto Ltd , fell nearly 2 per cent to $123.25.
Property investor GPT Group dropped 14.6 per cent to $2.10 after it slashed its earnings per share forecast for 2008 by a quarter to 21.2 cents and its full-year distribution forecast by the same amount to 20 cents per share, citing turmoil in financial markets.
The news also hit other property-related firms.
Lend Lease Corp finished down 4 per cent at $9.60, Stockland Group Ltd fell 6.3 per cent to $5.17 and Mirvac Group declined 3.5 per cent to $2.75.
Financial firms declined after their European counterparts fell on Friday on worries about further writedowns.
The top banks fell between 1.5 per cent and 2.1 per cent, with National Australia Bank Ltd shedding 1.7 per cent to $27.07 and Commonwealth Bank of Australia Ltd down 2.1 per cent at $41.45.
On a more positive note, Challenger Financial Group Ltd rose 5.4 per cent to $2.16 after it said it would buy back up to 10 per cent of its share capital.
