Despite opening strongly, the Aussie market collapsed into a heap in afternoon trade amid heightened fears over the health of Europe's financial system.

Stocks accelerated their losses after Moody's came out and downgraded a raft of European banks over their exposure to Greek debt.

Europe's debt problems weighed heavily on the big four banks. CBA shed 2.5% and NAB fell 3%.

The health care sector was dragged down by Cochlear, which plunged another 14.6% on the back of Monday's product recall.

The key mining stocks weakened despite stronger commodity prices overnight. BHP was down 1.1% and Rio Tinto dipped 0.8%.

The ASX 200 slumped 67 points (-1.6%), closing at 4006.