Oct. 29 (Bloomberg) -- Australian stocks slumped, dragging the benchmark index down by the most in four months, after the head of the country’s fourth-largest bank said the economy is “fragile” and U.S. new-home sales fell.

Australia & New Zealand Banking Group Ltd. lost 2.1 percent as profit fell short of analyst estimates and Chief Executive Officer Michael Smith said the country’s central bank should have waited to raise interest rates. Rio Tinto Group, the world’s third-biggest mining company, and Woodside Petroleum Ltd. declined at least 3.5 percent after commodity prices slumped.

The S&P/ASX 200 Index dropped 2.4 percent to 4,574.70 at the close in Sydney, its lowest close since Oct. 5 and the biggest decline since June 23. The gauge has rallied 45 percent from a five-year low on March 6 as government stimulus measures including cash handouts and infrastructure spending helped the nation skirt a recession.

“The market has been rewarding good economic data for months,” said Nader Naeimi, a Sydney-based strategist at AMP Capital Markets, which holds $75 billion in assets. “Investors are worried about whether the improvements we’ve seen are self- sustaining or just the result of stimulus which is fading.”

The Reserve Bank of Australia increased the overnight cash rate target on Oct. 6 to 3.25 percent from a 49-year-low of 3 percent amid signs the government’s policies are helping contain unemployment. The number of people employed unexpectedly rose in September from August, statistics bureau data on Oct. 8 showed, while the jobless rate fell to 5.7 percent from 5.8 percent.

Bad Debt

The International Monetary Fund has said Australia’s gross domestic product will rise 0.7 percent this year, bucking the 3.4 percent slide for advanced economies.

ANZ, Australia’s second-biggest provider of business loans, dropped 2.1 percent to A$22.85, even as second-half profit rose 13 percent on higher lending income and a slowdown in bad debts. Full-year net income fell 11 percent to A$2.94 billion ($2.6 billion), short of the A$3.13 billion expected by analysts in a Bloomberg survey.

“I don’t expect the situation to get any worse but there will be a little bit of a lag effect into the first half of next year,” Smith told reporters at a briefing. “We’re still in a volatile environment.” National Australia Bank Ltd., the nation’s biggest by assets, fell 2.6 percent to A$29.05.

Rio Tinto lost 4.9 percent to A$60.98. Copper prices dropped for the third-straight day in New York yesterday, the longest slump in six weeks, on concern demand may slacken after sales of new homes in the U.S. unexpectedly fell in September. BHP Billiton Ltd., the world’s biggest mining company, sank 3.3 percent to A$37.13.

Woodside, Australia’s second-biggest oil and gas producer, lost 3.5 percent to A$46.69, while rival Santos Ltd. sank 2.7 percent to A$14.90. Crude oil in New York dropped 0.3 percent in after-hours trading, adding to yesterday’s 2.6 percent slump.

To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net

Last Updated: October 29, 2009 02:05 EDT