The Australian market closed in the red, with the ASX 200 down 19 points, or 0.39 percent, at 4,909.6 - the lowest since July 2013.
Chris Weston, chief market strategist at spreadbetter IG, said in a note, "Traders faded the rally in the ASX 200 from an intra-day high of 4969 and this again shows that market players just aren't happy to bid up the market, especially with the madness likely to be seen on Thursday morning (AEDT)," referring to the impending Fed decision.
He added that while it is likely that traders want to buy risk assets once more, there's lingering concern over "being long in a market where traders genuinely inherit a belief of a policy mistake from the Federal Reserve."
Shares in four of Australia's largest banks - ANZ, Commonwealth Bank of Australia, Westpac, and NAB - closed down between 0.2 and 1.36 percent.
Earlier, the Reserve Bank of Australia (RBA) released its December meeting minutes, in which the central bank once again said it has room for further monetary policy easing if needed. The bank, however, added current economic data suggested the economy does not need more stimulus any time soon.
Australia's government said its forecast budget deficit will rise to A$37.4 billion ($27.13 billion) in the year to June due to falling commodity prices affecting key exports and thus reducing tax revenue.
Shares in Rio Tinto and BHP Billiton, Australia's two biggest miners, closed down 1 and 2 percent.
Iron ore producers were mixed. Fortescue Metals closed up 0.56 percent while Atlas Iron, Mount Gibson, BC Iron was down 6.25 percent. Iron ore prices traded at $37.50 a tonne in Asian trade.
Shares in Qantas Airways lost morning gains and traded down 2.38 percent. Earlier, the company said it expected first-half underlying profits before tax to double on-year to between A$875 million ($633.6 million) and A$925 million.
The Australian dollar traded higher at 0.7251 against the dollar.