Falls on the main Chinese share markets have driven the local bourse lower, completely erasing a tentative late morning recovery.

The Australian share market fell steeply in early trade this morning as investors factored in the impact of Europe's debt turmoil and the US credit downgrade.

The major Australian share indices both posted losses of more than 2 per cent on opening, before pulling back some of those losses.

However, falls of 3.7 per cent in Shanghai and 4 per cent in Hong Kong by 2:15pm (AEST) have seen the Australian market fall back into losses of around 2.5 per cent.

The ASX 200 had lost 109 points to 3,997 by 2:30pm, which is its first trip below 4,000 in more than two years.

The broader All Ordinaries Index was down 99 points to 4,071.

Tokyo's Nikkei had also seen steeper falls by early afternoon, and was down 2.5 per cent, after being around 1 per cent lower most of the morning.

Dow Jones Industrial Average futures were down 258 points to 11,144 by 2:00pm in the first US trading since Standard and Poor's downgraded the US credit rating to AA+.

Royal Bank of Scotland's head of trading in Australia, Justin Gallagher, says the nearest thing to a certainty on the market is continued volatility, with investors unsure about the economic and financial implications of the US downgrade.

"We're certainly in uncharted territory in regards to the US being downgraded," he said.

"No doubt the markets will be very anxious tonight, and a continuation of that nervousness is likely to continue in the short-term."

The falls in Australia have been broad-based, with 184 of the top 200 listed companies trading lower by mid-afternoon.

The major banks were all lower: the Commonwealth was down just 0.6 per cent, but NAB was down 3 per cent.

Retailers were also down, with Myer and Harvey Norman off 3.6 per cent, David Jones down 2.5 per cent, and JB Hi-Fi down 1.3 per cent after bouncing back from steeper early losses on its profit report.

In an indication of the volatility and conflicting forces on the market, so-called defensive stocks, considered not as vulnerable to fluctuations in the economic cycle, were among those companies falling, with Telstra and Woolworths both trading substantially lower.

The Australian dollar followed the afternoon market rout, losing about a cent to 103.3 US cents by 2:36pm.