The benchmark S&P/ASX200 fell 23.1 points, or 0.26 per cent, to 8,824.7, as the broader All Ordinaries slipped 19.8 points, or 0.22 per cent, to 9,116.1.
The dip came as shares in market heavyweight BHP tumbled 1.5 per cent to $41.90 after Bloomberg reported China's state-run iron ore buyer "asked" steelmakers and traders to pause shipments in an apparent negotiating tactic to secure lower long-term prices.
"Iron ore prices are already elevated (above $US100 per tonne) as the market is tight despite seasonally weak Chinese construction demand, which would likely see competitor products trade at a premium," RBC Capital Markets analyst Kaan Peker said on Wednesday.
"On government instructions, steel mills could try to offset BHP volumes via Fortescue, Rio, Vale, domestic ores or stockpiles, but in aggregate it would be at higher cost and efficiency loss and this would be at the margin as competitors could currently only absorb a very small portion of BHP's volumes."
Shares in Fortescue jumped more than two per cent in early trade, while Rio Tinto edged 0.1 per cent higher.
BHP, which has not yet spoken publicly on the matter, has been contacted for comment.
Prime Minister Anthony Albanese said China's action was "disappointing".
"When people are negotiating over price, sometimes these things will occur, but I want to see this resolved quickly," he said in Sydney.
In 2020, China placed trade restrictions on several Australian exports after the coalition government raised questions about the origin of the COVID-19 virus.
Relations didn't thaw until early 2024, under Labor.
Meanwhile, a looming US government shutdown has also sapped investor confidence, with no sign of the usual last-minute funding deal between deadlocked Republicans and Democrats to keep public services running.
Seven of 11 local stock market sectors were in the red by midday, as the financials sector fell 0.6 per cent, weighing on the Australian bourse.
All big four banks were trading lower, led by Westpac (down 1.44 per cent), while CBA slipped 0.5 per cent to $166.01 a share.
Gold miners helped offset broader weakness in the materials sector, as the precious metal hit a fresh record of $US3,875 ($A5,870) an ounce.
The defensive utilities sector outperformed the broader market, up 0.6 per cent as AGL shares rallied more than four per cent to $9.21.
Health care stocks gained 0.5 per cent, tracking with a lift in blood plasma giant CSL.
Defence technology company Droneshield loomed above the top-200 for a third straight day with a 13.5 per cent gain for the gravity-defying stock.
At the other end of the table was Liontown, which slipped more than eight per cent as lithium plays sold off after Chinese authorities rubber-stamped reserve reports from two key mines, settling concerns of a supply disruption.
Energy stocks tumbled 0.8 per cent after two consecutive days of losses in oil prices, as investors weigh a flagged OPEC+ output increase against the prospect of shrinking US inventories.
The Australian dollar is buying 66.01 US cents, steady with Tuesday's market close after spiking to 66.29 US cents overnight.
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