He said the Dow Jones futures moving higher had taken some fear out of a market that had been badly bruised by concerns that the two key pillars of the U.S. mortgage market, Fannie Mae and Freddie Mac, were facing funding issues.

At 0320 GMT, the S&P/ASX 200 index was down 33.3 points or 0.7 percent at 4,946.6 but above a morning low of 4,936.4. The All Ordinaries index was down 38.7 points or 0.8 percent at 5,029.1, above a morning low of 5,022.7.

Klusman said investors remain hesitant to test the market's upside though the fact the U.S. futures were higher had instilled some confidence.

"We just have to wait and see which way the U.S. market will run - it is as simple as that," he said.

Financial stocks were leading the falls due to concerns that losses related to the U.S. subprime market might be greater than expected.

On Friday National Australia Bank said it may make additional provisions for its $1.1 billion worth of collateral debt obligations exposure in the U.S.

National Australia Bank was down 2.4 percent at A$26.80. Commonwealth Bank had dropped 1.0 percent to A$39.91, Australia and New Zealand Banking Group had fallen 0.7 percent to A$17.82 but Westpac had gained 1.1 percent to A$19.21.

Conglomerate Wesfarmers was down 1.2 percent at A$32.65 after Chief Executive Richard Goyder said it may take five years to turn around ailing retailer Coles Group, acquired last year by the conglomerate in a share and cash deal worth about A$18 billion.

Elsewhere, Virgin Blue was up 1.0 percent at 51 cents after its major shareholder decided to distribute most of its 62.8 percent stake in the airline company to Virgin Blue shareholders.

Toll Chief Executive Paul Little said the proposal would remove an overhang in Virgin Blue's share registrar, providing more liquidity. It could make Virgin Blue vulnerable to a takeover offer.

Little said Virgin Blue was not a core investment. Toll was up 3.0 percent at A$6.58.

Meanwhile, resources stocks were mixed with BHP Billiton up 0.1 percent at A$40.37 but its takeover target Rio Tinto was down 0.8 percent at A$124.98.

Oil and gas sector leader Woodside Petroleum had gained 1.9 percent to A$60.94 as crude oil hovered at record levels, trading at more than $145 a barrel.

($1 = A$1.03)

bruce.hextall@thomsonreuters.com

MMMM

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AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - ASX ANZ
NATIONAL AUSTRALIA BANK LIMITED - ASX NAB
COMMONWEALTH BANK OF AUSTRALIA - ASX CBA
ST GEORGE BANK LIMITED - ASX SGB
WESTPAC BANKING CORPORATION - ASX WBC
TELSTRA CORPORATION LIMITED - ASX TLS
BHP BILLITON LIMITED - ASX BHP
QANTAS AIRWAYS LIMITED - ASX QAN
AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
RESERVE BANK OF AUSTRALIA
STANDARD AND POOR'S (AUSTRALIA) PTY LTD
MERRILL LYNCH (AUSTRALIA) PTY LTD
UBS AUSTRALIA LIMITED
BLOOMBERG LP
JETSTAR AIRLINES PTY LTD

452 Capital Pty Ltd ceased to be a substantial holder in Telecom Corporation of New Zealand Ltd on May 26.

Australia and New Zealand Banking Group Ltd reduced its interest in Royalco Resources Ltd on May 26 from 7.2 million (12.7pc) to 6.3 million shares (11.2pc).

Harbinger Capital Partners Master Fund I Ltd reduced its interest in Samson Oil & Gas Ltd on May 26 from 34.6 million (16.7pc) to 31.4 million shares (15pc).

AMP Ltd ceased to be a substantial holder in Babcock & Brown Power on May 26.

Alex Elberg ceased to be a substantial holder in NSL Health Ltd on May 27.

Australia and New Zealand Banking Group Ltd ceased to be a substantial holder in Viento Group Ltd on May 26.

Australia and New Zealand Banking Group Ltd reduced its interest in Fairstar Resources Ltd on May 23 from 30.2 million (8.6pc) to 26.3 million shares (7.4pc).

Australia and New Zealand Banking Group Ltd ceased to be a substantial holder in ARC Energy Ltd on May 22.

Bejjal Pty Ltd reduced its interest in Boss Energy Ltd on May 12 from 5 million (13pc) to 4 million shares (10pc).

Barclays Group reduced its interest in GPT Group on May 22 from 180.3 million (8.6pc) to 163.7 million stapled securities (7.6pc).

Julian Peters Pty Ltd ceased to be a substantial holder in Gas2grid Ltd on May 14.

AL & VRD Williams reduced their interest in Sun Resources NL on May 3 from 11.8 million (6.9pc) to 13 million shares (5.7pc).

Commonwealth Bank of Australia Ltd reduced its interest in Primary Health Care Ltd on May 23 from 44.3 million (11.9pc) to 40.2 million shares (10.8pc).

Nomura Asset Management Co Ltd ceased to be a substantial holder in Commonwealth Property Office Fund on May 27.

rweabn.com.au