The benchmark S&P/ASX200 fell 1.6 per cent to 5684.5, shedding $26 billion in value, after the S&P500 fell 1.1 per cent, its first drop by more than 1 per cent in 109 sessions.

Sparking the falls were worries that the US president will not get his signature bill repealing Obamacare through Congress due to larger-than-expected resistance among Republicans. With stock valuations already stretched, investors interpreted his struggles as a sign he may also face setbacks delivering promised tax cuts, one of the main drivers of the recent rally.

"You've finally seen the markets crack," said Perpetual head of multi-asset strategy Matt Sherwood.

"Uncertainty over the administration's efforts to revamp healthcare has fuelled concerns about the timing and ability of Trump to implement his economic agenda.

"All the time they're spending on healthcare reform, they're not spending on tax reform.

The difficulties faced by the administration in getting the bill through were not surprising, said UBS head of fixed income Anne Anderson. "But the markets were very bullish on the broader fiscal agenda being accomplished relatively quickly. The passage of the 'Affordable Care Act' may be slower and this risks a delay to congressional tax reform."

Contributing to the sell-off, JP Morgan head of quant strategy Marko Kolanovic pointed out that last week saw the expiry of a large number of options contracts on Wall Street. This meant for the first time in five months, the market was "free" to move lower.

"While we don't want to minimise the impact of political developments, today's move was primarily technical and should not be fitted into a political narrative".

While the ASX has lagged global markets in index growth this year, Mr Sherwood isn't surprised by the scale of Wednesday's local selloff. Commodity prices, a key support for local equities, have fallen over the past week, he said, over concerns about China tightening its monetary policy last week.

Australia's big four banks led the market lower, falling between 1.6 to 2.0 per cent. The big miners were hit hard, not helped by a move down in the iron ore price and continued weakness in the oil price. BHP fell 2.9 per cent, Rio Tinto was 2.6 per cent lower, while Fortescue and South32 shed 5.3 and 2.6 per cent respectively.

Investors fled to gold, pushing Newcrest Mining up 1.7 per cent despite its trading ex-dividend. The All Ordinaries gold index added 1.5 per cent.

Stock watch: Challenger

Shares in Challenger fell 1.2 per cent to $12.03 despite Bell Potter's Lafitani Sotiriou, who has been bullish on the stock for a while, raising his price target to $14.60 from $13, maintaining a 'buy' call on the financial services outfit. Rekindling his enthusiasm for Challenger is a more optimistic outlook in the growth prospects for Challenger's life book which he reckons will see 15 per cent growth annually from fiscal 2018 to fiscal 2021, up from 10 per cent expected previously. Much of the growth uplift here will stem from its link with Mitsui Sumitomo Primary, a distributor of its offering in Japan. "The stars are aligning for Challenger with a regulatory tailwind and burgeoning growth supported by new products and distribution relationships," he told clients.

Market movers

Iron ore

Chinese steel and iron ore futures dropped sharply for a second straight session as investors continued to cash in on recent gains even as the outlook in the physical market remains supported by a seasonal pickup in demand. The losses in both commodity futures came after they posted their largest weekly increases in two months last week. Traders say the wild swings in the futures market have unnecessarily swayed the physical market. As futures slid, spot iron ore overnight tumbled more than 4 per cent to $US87.59, its steepest single-day drop in three months.

Gold

As usual on days when equity investors are running for the hills, gold is in demand. The precious metal traded at $US1245 an ounce - a three-week high. "It seems that equity investors decided to take some money off the table, perhaps getting slightly wary about the progress in President Trump's legislative agenda," INTL FCStone analyst Edward Meir said. "Gold will likely continue to rally going into Wednesday's session as Tuesday's US stock market selloff was significant and will likely have a knock-on effect on international equity markets over the next 24 hours."

Bond yields fall

When the appetite for risk sours, bonds and the yen tend to rise. Both US as well as Australian government bond yields retreated further from highs hit last week, to 2.41 per cent and 2.76 per cent respectively (bond yields move inversely to prices). Meanwhile, the US dollar is trading around four-month lows against the yen, another safe haven. That didn't necessarily benefit the Aussie dollar, which as an even riskier asset was languishing at US76.65??, down 0.3 per cent for the session and further away from a four-month high of US77.48?? it hit Tuesday.

Nufarm rises

Nufarm shares hit a seven-year high after the agricultural chemicals supplier swung to a first-half profit of $20 million thanks to a 15 per cent increase in revenue. Revenue for the six months to January 31 rose to $1.36 billion, with the bottom line improving from a $91 million loss in the prior corresponding period - when the company booked restructuring costs of $102.9 million. Nufarm said revenue was up in all its regional crop protection businesses except Europe. Nufarm also lifted its interim dividend by 25 per cent to 5 cents a share, and flagged a reduction in net debt.