More than $50 billion has been wiped off the Australian share market as investors panic about the state of the global economy.

Local investors responded to a sharp fall on Wall Street overnight with heavy selling. By the close the All Ordinaries index had shed 4.2 per cent to 4,170. The ASX 200 index had lost 4 per cent.

Friday's percentage fall was the biggest since January 2009, with the weekly drop also the worst in two-and-a-half years.

IG Markets strategist Cameron Peacock said the "bloodbath" resulted from the anxiety about the European debt crisis spreading to Italy and Spain then colliding with America's debt problems.

"It all came to a bit of a head. That's why we're seeing this global rout at the moment" he said.

"Everyone thought after the (US) debt ceiling issue was resolved that markets would move higher.

"All it really did was focus the markets on some of the structural problems in the US economy."

At 5pm (AEST), the Australian dollar was trading at 104.42 US cents.

The Australian stock plunge came in the wake of a Wall Street rout that saw the Dow Jones lose more than 4 per cent, wiping billions off the value of US stocks in the worst one-day fall for two years.

Sorry, this video has expired Global stock markets take hard hit

The drop on local markets was so big it prompted Treasurer Wayne Swan to reassure investors exposed to the market.

"Growth remains strong in Australia. The economy is softer in the short-term, we outlined that in the budget," he said.

"We put in place a set of policies to return to surplus in 2012-13. Commodity prices remain high.

"That's why our fundamentals are strong and I remain confident that we will return to surplus in 2012-13.

"But I just want to make the point: we are not immune from these global events, but we are located in the right part of the world at the right time, and that is to our advantage."

But judging by today's falls, the market thinks otherwise.

In fact even our biggest resources companies, that generate much of their income from countries like China, were sold off heavily today.

BHP Billiton lost almost 5 per cent to close at $38.12, while Fortescue Metals fell over 6 per cent to finish at $5.74.

Oil stocks also plunged with New York one-month crude oil futures falling below $US84 a barrel by 5:15pm (AEST).

Woodside Petroleum closed down $1.95 to $34.55.

Investors also dumped retail shares, with Myer down 2.6 per cent and David Jones sliding 5.7 per cent to $2.79.

European markets continued the share sell-off on Friday (local time). Shortly after trading began, the UK's FTSE 100 index was down 2.8 per cent, while Germany's Dax index was 2.2 per cent lower.

Earlier Friday, Asian markets slumped with Japan's main index down 3.9 per cent and Hong Kong's market 5 per cent lower.

Market watchers are now nervously waiting for the release overnight of the latest employment numbers in the US, which are expected to bring further bad news about the state of the American economy.

"No-one knows what's going to happen. Anyone that pretends they do is kidding themselves," Mr Peacock said.

"You get these panic days - people just liquidate portfolios indiscriminately and that's why we're seeing such broad-based losses.

"A lot of companies out there are in stellar financial condition and are doing very well, but the baby gets thrown out with the bathwater, as they say."

RBS Morgans private client adviser Ken Howard says the market is being driven by sentiment, which makes forecasting the future tricky.

"Fundamentally I'd like to think the market is seeing the worst of it and will start to turn around," he said.

"But sentiment is what's driving the market's direction at the moment and not rational thinking and it's the speed at which that sentiment's turned in the last couple of weeks which is leading to the big sell-offs."

Westpac International economist Huw McKay says market volatility is something investors will have to get used to.

"This is far from good news. Equities aren't going to be like this everyday by any means, but I do think we are in a situation where financial turmoil is the default position," he said.

Grattan Institute program director and former ANZ chief economist Saul Eslake said Australian investors were worried about the prospect of another global recession.

"If the world as a whole hits a recession, there's a very good chance that we will have one as well," he said.

"Although it's important to remember that what happens in America and Europe doesn't matter as much to us as it used to, and the most important foreign economy for us is China, which although it's slowed a little bit, is still growing at a very strong pace and generating very strong demand for our resources."