The benchmark S&P/ASX200 index suffered its worst loss in four months on Monday, dropping 152.9 points, or 1.79 per cent, to a two-week low of 8,379.4.
The broader All Ordinaries fell 161.3 points, or 1.84 per cent, to 8,628.4.
The selloff came after President Trump over the weekend imposed 25 per cent tariffs on Mexico and Canada, and 10 per cent on China.
"This will be the golden age of America!" Mr Trump posted on social media. "Will there be some pain? Yes, maybe (and maybe not!)"
RBC Capital Markets' London-based global head of FX strategy, Elsa Lignos, said that while some were saying that the tariffs wouldn't last more than a few weeks, she she was among those who saw them as a big shock that the markets hadn't anticipated.
"Up until now I also thought Trump's main goal was to extract a 'win' even if it was more iconic than substantive," Ms Lignos wrote.
"But the very short lag to implementation and the way he's gone about this makes me think he actually believes tariffs are going to be the new income tax."
Canada and Mexico had also responded with tariffs of their own, while China vowed to retaliate with its own unspecified counter-measures.
The Australian dollar meanwhile briefly dropped under 61 US cents for the first time in nearly five years, since early in the COVID-19 pandemic.
The Aussie was already down sharply on the tariff news and fell through the 61 cent level after a private survey of China's economy known as the Purchasing Managers' Index showed a continued decline in the country's manufacturing sector last month.
The Australian dollar fell as low as 60.88 US cents, its lowest level since April 2020, although by late afternoon the AUD had rebounded to 61.27 US cents - still down sharply from the 62.25 US cents it was buying late Friday afternoon.
IG market analyst Tony Sycamore said that unless the Aussie could rebound to around 63.50 US cents, it risked testing the psychologically significant 60-cent level before a move lower towards 57 cents.
As for equities, every sector of the ASX finished lower on Monday, with health care the biggest loser, dropping 2.3 per cent.
Fisher & Paykel Healthcare slid 7.4 per cent to a six-month low of $31.80 as the Kiwi respiratory device-maker said the tariffs would likely hurt its bottom line in 2025/26, given that 45 per cent of its sleep apnoea products are manufactured in Mexico.
Managing director and chief executive Lewis Gradon said the company took a long-term view and would be working with global suppliers and US customers to find a way to mitigate the impact of the tariffs on all parties.
All of the big four banks lost ground, with NAB retreating 2.3 per cent to $39.22, Westpac falling 1.7 per cent to $33.16, CBA declining 1.5 per cent to $158.13 and ANZ subtracting 1.4 per cent to $30.20.
In the heavyweight mining sector, BHP dropped 1.8 per cent to $39.24, Fortescue declined 4.4 per cent to $18.29 and Rio Tinto retreated 2.1 per cent to $114.91.
Westgold was the biggest loser in the ASX200, falling 12.4 per cent to a six-month low of $2.26 as the goldminer trimmed its full-year production guidance, citing engineering issues at two of its WA mines.
ON THE ASX:
* The benchmark S&P/ASX200 index on Monday dropped 152.9 points, or 1.79 per cent, to 8,379.4.
* The broader All Ordinaries fell 161.3 points, or 1.84 per cent, at 8,628.4.
CURRENCY SNAPSHOT:
One Australian dollar buys:
* 61.27 US cents, from 62.26 at the close of business Friday
* 95.25 Japanese yen, from 96.43 yen
* 59.80 euro cents, from 59.92 euro cents
* 49.87 British pence, from 50.12 pence
* 110.53 NZ cents, from 110.26 NZ centsÂ
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