The Australian share market has rallied after early losses, despite further steep falls for Chinese stocks, as 'bargain hunters' snap up the battered banking sector.

With all stocks trading after the open, the benchmark ASX 200 was initially off 1.5 per cent to 4,928, while the broader All Ordinaries index (which includes many smaller firms as well as the top 200) was down 75 points to 4,939.

It is the first time Australia's major share indices have dropped below 5,000 points in more than two years.

However, within 20 minutes the market had edged into positive territory as some investors looked to pick up battered blue chip stocks.

Key points: Australian shares fell 1.5 per cent early, ASX 200 low of 4,928

Australian shares fell 1.5 per cent early, ASX 200 low of 4,928 Local market rallies as much as 3 per cent to high of 5,152

Local market rallies as much as 3 per cent to high of 5,152 Big four banks rally, leading broader market gains

Big four banks rally, leading broader market gains China share falls continue, Shanghai market down 4.3 per cent

That bounce was even shorter lived, with the bears - market pessimists - taking control back from the optimistic bulls, as the sell-off resumed.

In a another twist, however, the market rallied to even stronger gains, with a surge in the major banks' stocks driving the ASX 200 as high as 5,139.

Even a 6.4 per cent fall at the open for China's key Shanghai composite index could not completely reverse those gains.

At 12:21pm (AEST) the ASX 200 index had jumped 2.2 per cent to 5,112 and the All Ordinaries was 107 points up at 5,121.

Some major Australian blue chip companies which were hammered yesterday surged today, as 'bargain hunters' moved in to pick up what they see as cheap stocks.

Westpac, which slumped more than 6 per cent yesterday, was up 4.5 per cent at $30.77, with the other major banks posting 3 per cent-plus rises.

BHP Billiton spin-off South32 jumped 9.6 per cent to $1.54 after slumping 7.6 per cent yesterday.

The company that it split from had a more modest 1.3 per cent rise, ahead of BHP Billiton's annual profit results due after the Australian market closes this afternoon.

Rival Rio Tinto was up 2.3 per cent to $48.03, while battered iron miner Fortescue, which dived nearly 15 per cent on its full-year profit result yesterday, had recovered nearly 9 per cent to $1.78.

Aussie stocks shrug off another Chinese share slump

The big test for Australian stocks was thought to come when Chinese share markets opened at 11:30am (AEST), with yesterday's 8.5 per cent rout in Shanghai being the main trigger that sent local shares from steep losses to a 4 per cent plunge.

IG's chief market strategist Chris Weston this morning predicted that only very brave investors would be venturing into the Australian market today.

"The moves are so aggressive and so extreme, that the idea of buying fear is only for the bravest of souls," he wrote in a note.

However, there seem to be many of those, with high volumes of shares changing hands on the ASX.

Mr Weston this morning had noted that almost 90 per cent of companies were trading below their 50-day average share prices when the market opened today, and this has led to strong rallies on the five other occasions that has happened since 2007.

He said that signal was "screaming buy" and clearly many investors had heard the message, especially regarding the big four banks.

"There seems to be a belief now that the banks have offered that value, we've seen a note from UBS as well upgrading CBA to a buy," he said.

"The banks are absolutely flying, we need to remember as well that they have been heavily, heavily beaten up. The market itself was grossly oversold."

The rally certainly did not stem from China.

The Chinese central bank did inject 150 billion yuan ($32 billion) into the interbank market this morning, but similarly large cash injections did little to stem market losses last week and appear to have had minimal impact today, with the Shanghai composite index still down 4.3 per cent by 1:52pm (AEST).

The uncertainty about what will happen in the world's second largest economy has seen share market volatility rise to extreme levels, even as many markets around the region rally.

Chris Weston said the local market is also seeing some of the highest volatility for several years, as measured by the Australian VIX.

"That's up 53 per cent today to the highest level since December 2013," he observed.

"I think that tells you something there - if you're happy to trade and invest in volatility then this market's been offering you a gift today."

However, he also warned that it may not be a gift that keeps on giving to share investors who buy in.

"The question is will this continue to move up or is this a dead cat bounce within a very aggressive sell-off we've been seeing," Mr Weston cautioned.

The Australian dollar also pulled back from overnight falls to as low as 70.37 US cents, trading at 72.25 US cents by 12:35pm.