The S&P/ASX 200 index fell 1.2 percent to end at 5,589.50, having declined as much as 1.4 percent earlier for it's biggest intraday percentage slide since Dec 10.
The Fed is widely expected to raise interest rates on Wednesday, though all eyes will be on whether it signals a slowdown, or even a pause, to its 3-year tightening spell. In September the U.S. central bank signalled three more rate hikes next year, but slackening global growth has seen money market futures pricing in less than one such move.
At home, the Australian central bank on Tuesday noted that the outlook for household consumption continued to be a source of uncertainty with falling home prices, low wage growth and high debt levels posing downside risks to the economy.
The energy index tumbled 2.7 percent to its lowest since October last year, driven by a sharp drop in oil prices on oversupply worries in the United States and concerns over global demand.
Transport fuel supplier Caltex Australia was the top loser on the index, falling as much as 7.8 percent to its lowest in over four years, after the company announced weak 2018 profit guidance.
The price of copper, seen as a barometer of global growth, also slipped and dented mining stocks. Sandfire Resources dropped as much as 3.2 percent and mining giant BHP Group fell 1.6 percent.
The Financial index ended 1.5 percent lower, earlier sinking to a near three-year trough, as banking stocks came under pressure following the Reserve Bank of New Zealand's (RBNZ) proposal to almost double capital requirements for the New Zealand units of Australia's four major banks.
National Australia Bank Ltd fell 1.8 percent to over six-year lows, after the lender said on Monday it would raise Tier 1 capital for its New Zealand subsidiary by about NZ$4 billion to NZ$5 billion ($2.74 billion to $3.42 billion).
New Zealand's benchmark S&P/NZX 50 index fell 0.65 percent or 57.22 points to finish the session at 8,688.37.
Heartland Group Holdings led losers, declining 6.9 percent to hit its lowest since August 2016, while Synlait Milk fell 3.8 percent to its lowest since Nov 28.