The S&P/ASX200 finished the day on its lows, 0.4 per cent down at 5295.6, while the broader All Ordinaries index closed 0.4 per cent higher at 5361.9.

Mr Stevens in his first public comments since the RBA cut rates earlier this month defended the bank's inflation target, saying that it was not rigid, but provided sufficient flexibility for sound decision-making.

The Australian dollar had its biggest drop in almost a week, falling more than half a cent to US71.67¢, its lowest since early March after comments from Mr Stevens did little to diminish expectations for further policy easing.

The local sharemarket had received a flat lead from Wall Street, while the iron ore price tumbled 6.7 per cent to $US51.22 a tonne - a far cry from April 21 when it was trading at $US70.46.

Iron ore's drop to a 10-week low showed the "remarkable volatility" of Australia's largest export, said easyMarkets senior dealer Andreas Tjahja.

"It's a reflection of how sensitive the market is to sentiment of China's recovery. The moves are also exaggerated by the speculative inflows into Chinese commodities futures and the lack of liquidity in iron ore market," said Mr Tjahja.

"Global equities are in gridlock, trading in a narrow range. With uncertainty brewing over US Fed's next move, investors and traders are sitting on the sideline. Risk events that could be catalysts for new direction include fresh disruption in the oil market and a refocus to China's issues - the yuan, non-performing loans and excess capacity.

But the big miners proved remarkably resilient, despite another 2 per cent drop in iron ore futures during Asian trad eon Tuesday.

BHP Billiton traded flat at $18.38 while Rio Tinto closed 0.4 per cent higher at $44.20, but iron ore pureplay Fortescue fell 2 per cent to $2.85.

After briefly posting a gain in the afternoon following the Stevens remarks, the benchmark S&P/ASX200 index followed regional markets down as global investors fretted over the prospects of a US Federal Reserve rate hike as early as next month.

Japan's Nikkei fell 0.9 per cent, while the Shanghai Composite was down 0.7 per cent in late trade.

"There was not a whole lot of movement today," said Commsec market analyst Steven Daghlian.

"We're treading water at the moment. The ASX200 is remaining above 5300, that psychological barrier for markets. The price of oil has fallen for four straight days so that's putting energy stocks under the most pressure, although the miners are a little firmer.

"The same sort of movers from Monday are moving today: Flight Centre, Qantas."

Monday's best performer, Bluescope, traded down Tuesday after a "bit of cash was taken off the table," said Mr Daghlian.

Among the banks, ANZ Banking Group closed 0.7 per cent lower at $24.78, Commonwealth Bank fell 0.5 per cent to $77.56, National Australia Bank lost 0.6 per cent to $26.97 and Westpac dropped 0.4 per cent to $29.78. Telstra was 1.2 per cent lower at $5.59.

Among energy stocks, Santos slipped 1.9 per cent to $4.17 and Woodside declined 1.3 per cent to $26.45.

Flight Centre fell a further 5 per cent to $31.88 after Monday's steep losses while Bluescope shed 3 per cent to $6.09 after profit-taking.

Oil Search shed 1.5 per cent to $6.51 after dissident shareholders in InterOil blasted the proposed $US2.2 billion ($3 billion) takeover by the company.

Former chief executive and InterOil shareholder Phil Mulacek and his supporters described the proposed takeover as "a bad deal at the bottom of the market".

They say the deal "significantly undervalues" the Papua New Guinea gas resource holder and wipes out about $US1 billion in future value that the company was due to receive from French oil major Total.

Oil Search managing director Peter Botten is scheduled to meet Mr Mulacek this week in PNG as he and InterOil management seek to convince shareholders of the merits of the deal.

Woolworths shed 0.9 per cent to $21.99 after Big W boss Sally Macdonald pre-empted a strategic review by Woolworths chief executive Brad Banducci, slashing buying staff and restructuring the discount department store chain's overseas sourcing.

In moves that will significantly reduce costs, boost earnings and accelerate Big W's shift towards becoming a product-and-design-led retailer, Ms Macdonald sacked about 40 buyers and assistant buyers from Big W's head office last week.

Big W's direct sourcing operations in Hong Kong have been separated from Woolworths' food and grocery sourcing operations and a senior Big W executive, Jeff Vickery, has been posted to Hong Kong as head of quality, sourcing and production to strengthen the group's direct sourcing channels.