By Colin Packham and Rebecca Howard
SYDNEY/WELLINGTON, Jan 20 (Reuters) - Australian shares fell 0.7 percent on Wednesday led by a tumble in mining stocks as weak commodity markets eroded nearly all the gains from the previous session.
The S&P/ASX 200 index .AXJO fell 32.7 points, or 0.67 percent, to 4,870 by 0203 GMT. The benchmark rose 0.9 percent on Tuesday, lifting off from 2-1/2-year low of 4,803.9 touched at the start of the week.
Mining stocks skidded, with BHP Billiton (L:BLT) BHP.AX falling more than 3 percent to stand near its weakest since May 2005. Shares in Rio Tinto (L:RIO) fell more than 1.6 percent.
BHP Billiton said on Wednesday that it sees no recovery in iron ore or coal prices in the next few years while holding out hope for a rebound in copper and oil as the company fights a slump in earnings set to hit its long-protected dividend. stocks also fell with Westpac Banking Corp WBC.AX and ANZ Banking Group ANZ.AX each falling more than 2 percent, with analysts highlighting the two banks as having the biggest exposure to commodities.
"Sentiment seems to be to be extremely negative in the commodities at the moment," said Assad Tannous, head trader at Asenna Wealth Solutions.
"If you have a look at a bank like ANZ and you look at their loan exposure to commodities, I think sometime in the near future they are going to write off some bad loans. And that's going to have a ripple effect on the other banks and I think we are going way lower."
New Zealand's benchmark S&P/NZX 50 index .NZ50 rose 0.3 percent or 15 points to 6,139.53 in tepid trading after a choppy session on Wall Street.
The biggest gainer was A2 Milk ATM.NZ , up 4.6 percent as bargain hunters moved back in after the stock shed some of its recent gains on investor jitters. Xero XRO.NZ added 2.5 percent.
In the other direction, Mighty River Power MRP.NZ shed 2.7 percent after the company said energy prices were down 1.5 percent on the year in the three months ended Dec. 31. Volumes fell 7 percent and the energy firm said "reduction in overall customer sales volumes reflects the highly competitive market across both residential and commercial."
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(Editing by Shri Navaratnam)