The benchmark S&P/ASX 200 Index dropped 42 points, or 0.8 per cent, to 5412.5. The broader All Ordinaries Index fell 37 points, or 0.7 per cent, to 5396.6.

The big lenders extended losses from last week as investors grow increasingly worried about the impact of tougher regulations and higher capital reserve requirements.

Commonwealth Bank of Australia shares fell 1 per cent to $80.99. Westpac Banking Corp dropped 0.9 per cent, to $32.72, while National Australia Bank eased 0.9 per cent to $32.39 and Australia and New Zealand Banking Group finished 1.3 per cent lower at $31.90

Among other bluechips, Telstra eased 0.7 per cent to $5.76 and supermarket owners Woolworths and Wesfarmers fell 0.7 and 0.8 per cent, respectively, to $33.46 and $43.78.

Economists had expected a 0.5 per cent increase in Japan's gross domestic product over the September quarter, and so when official data revealed a 0.4 per cent contraction, local shares came under pressure.

After shrinking 1.8 per cent over the June quarter, Japan's economy officially entered into recession, defined as two consecutive quarters of contraction.

The country's benchmark Nikkei sharemarket index in late trade was 2.5 per cent down, with analysts predicting a sales tax hike mooted for next year was now even less likely to happen.

Local selected agricultural names were buoyed by the finalisation of a free trade agreement with China.

"Although Australia's trade ties to China are already strong, most of this trade is currently in minerals and energy," said HSBC Australian and New Zealand chief economist Paul Bloxham.

"The free trade agreement should help to encourage growth in Australian exports of agricultural products and services to China's rapidly growing middle classes."

Resource giants BHP Billiton and Rio Tinto began the trading session in positive territory, but ended lower.

"A big concern is the materials space, it has been god-awful, especially down the bottom end with the higher cost players that are weighing on the market," said Hugh Dive, head of listed equities at Philo Capital, adding: "The big guys, like BHP and Rio can handle a fall in the iron ore price".

BHP eased 0.1 per cent to $33.22 and Rio fell 0.3 per cent to $59.90. Fortescue, however, gained 4.6 per cent to $3.18.

Smaller miners, particularly gold producers, were among a minority of stocks to post gains. The largest gold miner, Newcrest Mining, added 2.6 per cent to $9.34.

Energy stocks enjoyed some limited gains early after the global benchmark Brent oil price jumped 1.9 per cent to $US79.41 a barrel on Friday, briefly interrupting a more than 30 per cent slump in the price of the commodity since June.

Santos added gained 0.1 per cent to $11.99, while Beach Energy added 0.5 per cent to $1.07. But the broader sector closed lower after heavyweight Woodside Petroleum drooped 0.9 per cent to $39.10, while Oil Search fell 1.1 per cent to $8.10.

with Max Mason