The benchmark S&P/ASX200 index skidded to 4,880.
1 at 1120 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.
IG market analyst Angus Nicholson said that whether the market finished above the 4,910 level cited by analysts as a possible floor for stocks could be crucial for investor sentiment.
“Everyone’s going to want to see a close above that but on top of that is whether we start to see some consistent intervention by the chinese government in the FX and equity markets,” Mr Nicholson said.
“If we do start seeing that today and tomorrow, that might start changing investor perception and perhaps bring a bit more buying to the market.”
The continued selloff in Australia comes after Wall street ended a volatile week with its worst five-day start to a year ever.
“It’s looking like a pretty messy open as things are slowly unwinding,” Mr Nicholson said, adding that IG Markets expected a drop of about 1.4 per cent for the day.
The big four banks were all in negative territory, with Commonwealth Bank down 86 cents, or 1.08 per cent, at $78.56, and National Australia Bank down 32 cents, or 1.15 per cent, at $27.40.
ANZ dropped 22 cents, or 0.86 per cent, to $25.32, and Westpac was down a relatively modest 17.5 cents, or 0.56 per cent, to $30.82.
BHP Billiton and Rio Tinto were hit again, with both mining giants declining more than 3.5 per cent as the price of iron ore continued to fall. BHP was down 60 cents, or 3.67 per cent, at $15.75, while Rio was down $1.65, or 3.94 per cent, at $40.25.
The energy sector’s woes continued, with Santos down 9.0 cents, or 2.66 per cent, to $3.29, and Oil Search, Orora and Woodside Petroleum showing similar declines.
Shares in iSelect slumped 33 cents, or 30 per cent, to 77 cents after the comparison website sharply cut its full year EBIT guidance to $15-$18 million, from $26 million.
“That’s quite shocking, the fact they’re reporting such errors in their management,” Mr Nicholson said.
“It looks like quite a lot of mismanagement going on there and investors are pounding it at the open.”
Key facts:At 1200 AEDT on Monday, the benchmark S&P/ASX200 index was down 83 points, or 1.66 per cent, at 4,907.8 pointsThe broader All Ordinaries index was down 82.4 points, or 1.63 per cent, at 4,967.4 pointsThe March share price index futures contract was down 70 points at 4,860 points, with 23,152 contracts tradedAt 1216 AEDT, national turnover was 872 million securities traded worth $2 billion