Australian shares dropped to their lowest in four weeks as investors were spooked by talk Greece could reject the bailout that saved it from bankruptcy.

The benchmark S&P/ASX200 index fell 39.2 points, or 0.9 per cent, to 4275.1, its lowest close since April 11, while the broader All Ordinaries index dropped 43.7 points, or 1 per cent, to 4332.2.

Among the sectors, gold plunged 4.9 per cent on the back of a sharp drop in the goldprice, materials lost 2 per cent, energy fell 2.2 per cent and financials slipped 0.3 per cent. Telcos were the only sector to post a gain, rising 0.8 per cent.

Fears gripping global markets also saw the dollar drop as low as $US1.0052, with traders saying the currency could drop below parity with the greenback over the next few days. This evening, the Aussie was trading at $US1.0078.

Risk rally derailed

Concern that political upheaval in France and especially Greece could reignite the eurozone's debt crisis and affect global demand has seen local stocks wiping out three weeks of gains in just four sessions.

"This Greece political uncertainty has the potential to derail the risk rally we have seen this year," said Stan Shamu, a strategist at IG Markets, noting that Greece was "a country that is staring in the face of 24 percent headline unemployment and 51 percent youth unemployment".

‘‘We probably will continue to see this risk-aversion until there is some sort of conclusion to the Greek crisis, but it doesn’t seem like it is something that will happen anytime soon,’’ he said.

Mr Shamu also said the absence of an expected cut in company tax in last night’s federal budget had been a point of interest on the market, but had not been a driver of sentiment.

Newcrest hit by gold price

Gold producer Newcrest Mining slumped 5.3 per cent to $23.80 after gold prices fell to a four-month low. Bullion this year has tended to trade in tandem with risk assets such as stocks and oil, while assets such as Australian government debt have become a safe-haven favourite.

The yield on the 10-year federal government bond fell to another record low, hitting 3.36 per cent, as Australia is one of the few remaining ‘AAA’-rated countries.

Other miners also fell, with BHP Billiton losing 1 per cent to $34.33 while Rio Tinto sank 1.7 per cent to $61.23, its lowest since December.

luka Resources dropped 8.3 per cent to $12.85 after it lowered zircon production from 500,000 tonnes to 430,000 tonnes for the year.

Retailers fell after announcing some management reshuffles.

Billabong named as new chief executive Launa Inman, who spent seven years managing discount department store Target, a division of Wesfarmers. Shares of Billabong fell 4.6 per cent to $2.29.

David Jones lost 2.9 per cent to $2.31 after it shook up its head office management and flagged a one-off restructuring charge in the second half. Rival Myer slumped 3.9 per cent to $2.25.

Telstra remains in demand

Telstra rose 3 cents, or 0.8 per cent, to $3.65, as investors chased its reliable dividend.

"Telstra remains resilient and seems to be the best play in the market right now ... with its high-yielding nature continuing to attract buying," Mr Shamu said.

Rival Optus said it added 80,000 customers in the three months to the end of March, according to parent SingTel.

Mirabela Nickel requested a trading halt after its shares plunged 30 per cent to their weakest since late-2004. The company is expected to update the market early tomorrow.

Banks close mixed

The major banks were mixed, with ANZ nudging up 1 cent to $23.12, National Australia Bank easing 2 cents to $24.61, Westpac inching up 1 cent to $22.84, and Commonwealth Bank down 42 cents to $51.66.

Engineering firm Downer EDI was 5 cents richer at $3.47 after it told investors its troubled Waratah Train project is back on track and would be delivered within cost and program.

Steel maker BlueScope Steel lost 1.5 cents to 37 cents after it completed a tender for the repurchase of $US300 million private placement notes.

Renewable energy company CBD Energy was steady at 4.5 cents as it secured $US25 million in financing to help it ramp up plans to build solar projects in Europe.

BusinessDay, with wires