The local decline came despite an unexpectedly strong set of employment figures and a drop in the jobless rate.

The S&P/ASX200 benchmark index closed down 72.9 points, or 1.2 per cent, to 5883.2 points on Thursday.

The All Ordinaries index finished 77.7 points lower, or 1.3 per cent, at 6069.2.

"It's been a bit of a shocker," IC Markets general manager Nick Twidale told AAP.

"It just feels like we are seeing this correction that a few people have been waiting for a while."

The local market went into the jobs figures with a negative tone after a soft finish on Wall Street.

The Aussie dollar also failed to maintain a brief rally above 73 US cents, even as Australia's unemployment rate tumbled to 6.8 per cent from 7.5 per cent, when economists were expecting a further rise to 7.7 per cent.

Most sectors of the share market were down on the day.

Market heavyweights like BHP were down 1.8 per cent to $37.31, while among the major banks the Commonwealth was fell 1.1 per cent to $65.00, but Westpac rose 0.3 per cent to $16.81.

IG Markets market analyst Kyle Rodda said the local market was getting swept up by potential volatility in US markets later in the day as flagged by early trading in US futures.

"It's more focused on global issues than what's happening domestically," Mr Rodda told AAP.

"We are seeing this highly correlated move to the downside on risk assets globally. Global market sentiment is looking a bit shaky too."

Along with a drop in the unemployment rate, the number of people employed jumped by 111,000.

This marked a third month of exceptionally strong employment figures, which have now recovered over half of the steep jobs losses recorded in April and May when the country went into lockdown to combat COVID-19.

"These numbers are encouraging," Treasurer Josh Frydenberg told reporters in Canberra on Thursday.

But he says unemployment still remains high and his October 6 budget will focus on getting people back to work.

In its interim economic outlook, the Organisation for Economic Cooperation and Development now expects a slower recovery in 2021 for Australia after slumping into its first recession since the early 1990s.

It now predicts a smaller contraction of 4.1 per cent in 2020, compared to the five per cent contraction it forecast in June.

But for 2021 it now sees growth of just 2.5 per cent rather than 4.1 per cent. This is still below Australia's long-run growth average of 2.75 per cent.

The major share indices on Wall Street fell by up to one per cent on Wednesday after failing to follow-through on earlier gains.

As expected the US Federal Reserve left its key interest rates unchanged after its two-day meeting and issued a slightly less dire outlook for US economic growth and unemployment this year.

But the central bank promised to keep policy accommodative for at least three years.

The Australian dollar ended at 72.65 US cents, after only a brief spike above 73 cents on the jobs numbers, and compared with 73.16 US cents late on Wednesday.

ON THE ASX

* The S&P/ASX200 benchmark index closed down 72.9 points, or 1.2 per cent, at 5883.2 on Thursday.

* The All Ordinaries index finished 77.7 points lower, or 1.3 per cent, at 6069.2.

* At 1711 AEST, the SPI200 futures index was trading up seven points, or 0.1 per cent, at 5870 points.

CURRENCY SNAPSHOT

One Australian dollar buys:

* 72.65 US cents, from 73.16 US cents on Wednesday

* 76.31 Japanese yen, from 77.09 yen

* 61.76 Euro cents, from 61.72 cents

* 56.20 British pence, 56.76 pence

*108.68 NZ cents, from 108.67 cents

Australian Associated Press