The S&P/ASX 200 index settled 0.1 per cent lower at 6,745.4, after gaining as much as 0.5 per cent in earlier trading.
The United States, the European Union, Britain and Canada imposed sanctions on Chinese officials on Monday, seeking to hold Beijing accountable for mass detentions of Muslim Uighurs in northwestern China.
Beijing hit back immediately with punitive measures against the EU that appeared broader, including European lawmakers, diplomats, institutes and families, and banning their businesses from trading with China.
“There is a bit of a worry on the Chinese sector, and that is leading to negative sentiment in Australia” said Nick Twidale, chief executive officer of APAC at FP Markets.
“We are moving into a fearful market sentiment where investors are almost hopefully long, but are much more on alert to any bad news that comes their way.”
In Australia, energy stocks shed 1 per cent, dragged down by a fall in oil prices as new pandemic curbs in Europe raised fuel demand recovery concerns.
Woodside Petroleum and Santos Ltd fell 1.1 per cent and 2.5 per cent, respectively.
Technology stocks were weighed down by a 2.2 per cent drop in buy-now-pay-later giant Afterpay Ltd to a two-week closing low.
Financials also eased with all the “Big four” banks closing in negative territory.
Healthcare stocks, however, climbed 0.7 per cent as a weaker Australian dollar benefitted export-reliant healthcare companies that earn in U.S. dollars.
New Zealand’s benchmark S&P/NZX 50 index closed 0.5 per cent higher at 12,394.34.
Payments platform operator Pushpay Holdings jumped 10.2 per cent in its best session in 10 and a half months and was the top gainer on the bourse after investors Peter Huljich and Christopher Huljich entered deals to sell their entire stakes to global investment firm Sixth Street.