The sharemarket is set to enter the final trading day of the year on edge after worries that US politicians would not be able to avert the looming fiscal cliff sent US stocks on their biggest one-day fall in more than a month.
Futures markets indicate the ASX 200 index will open 1 per cent lower this morning at 4624, wiping out gains in the three trading days last week that sent Australian shares to a 19-month high of 4671.3 points.
In the US, the Dow Jones Industrial Average tumbled 1.2 per cent on Friday, its fifth straight decline and its biggest drop since November 14, despite some better than expected economic data.
The fall came amid signs that President Barack Obama and the Republican-controlled House of Representatives were still far away from a deal to curb automatic tax rises and spending cuts due to come into effect tomorrow in the so-called fiscal cliff.
"Markets are getting quite jittery and they are continuing to ride the momentum of the negotiations," said Matthew Sherwood, head of investment market research at fund manager Perpetual.
"This will present a headwind for Australian markets on Monday. The sectors hit the hardest will probably be the cyclicals because if America goes over the fiscal cliff, the economy's growth rate will slow as you get higher tax rates and lower household income."
If Australian shares finish today at the futures price, it would put the ASX 200 index at a one-week low but still up 13 per cent for the year -- the first positive year since 2009.
Despite the concerns about the US economy, the US dollar continued to hold up against major currencies as traders put faith in the greenback's safe-haven status and high liquidity.
On Friday night, the Australian dollar fell US0.04c to $US1.0373.
"Currencies and equities will hold unless there is reason to believe that a deal will not be done by the end of the year or early 2013," Mr Sherwood said.
"Unless there is a rapid change in negotiations, this (a deal) is looking increasingly unlikely."
The Australian dollar held up better than most major currencies, partly because of the strength in prices of the nation's biggest export, iron ore, which held steady on Friday night at a seven-month high of $US139.40 a tonne.
Iron ore has been the surprise performer in commodity markets in the past quarter, rebounding from a steep drop in September when the price of Australian's biggest export earner slumped to below $US90 a tonne.
Buttressed by positive sentiment in China that the economy is not heading for a hard landing, along with supply concerns for iron ore production in China itself thanks to a winter freeze at its northen mines, analysts expect prices to hold firm or move higher in the months ahead.
Westpac has tipped $US170 by mid-2013.