The benchmark S&P/ASX200 index skidded to 4,880.1 at 11.20am (AEDT), its lowest point since July 2013, before rallying back above 4,900 soon after.
The resource and energy sectors are the hardest hit after another tumble in commodity prices.
Oil players Santos and Origin are down more than four per cent, while mining giants BHP Billiton and Rio Tinto have also lost more than four per cent.
The banks are also well down, with best performer ANZ down 1.33 per cent.
The Australian dollar has plunged to a four month low as persistent worries about the Chinese economy weigh on the currency and on equity markets.
At noon (AEDT) on Monday, the currency was trading at 69.54 US cents, down from 70.51 cents on Friday.
Over the weekend, it fell as low as 69.27 US cents, its weakest level since September 7, 2015.
OANDA Australia and Asia Pacific senior technical analyst Stuart McPhee said the Australian dollar is heading for its six straight session of falls after the Shanghai share market dropped 10 per cent last week.
“Concerns over markets in China and scepticism over whether their regulators have the smarts to deal with them continue to haunt the Australian dollar,” he said.
“If it continues to fall, the Aussie will be entering a new era of being quoted with a ‘6’ in front and trading at levels not seen for seven years.”
AAP
