The All Ordinaries Index closed 25 points lower to 6,652, while the ASX 200 slipped 26 points to 6,634.

Once the inflation figures were released this morning the share market dropped with most of the major banks falling slightly.

Even though the main measure of inflation, the Consumer Price Index (CPI), fell to an eight-year low of 1.9 per cent all eyes were on the Reserve Bank's underlying measures.

It rose about 1 per cent in the September quarter pushing the annual rate to about 3 per cent.

Most economists are predicting the increase will leave the Reserve Bank little choice but to increase interest rates next month.

In morning trade the domestic market gained about 1 per cent after a strong lead from Wall Street.

The market started to erase all its gains after reports surfaced that one of the world's largest financial companies, Merrill Lynch, may incur losses because of the US credit crisis.

The Commonwealth Bank slipped 36 cents to $58.65, while Macquarie Bank lost 2.5 per cent to $79.88.

In the resources sector, BHP Billiton dropped 20 cents to $45.80, and Rio Tinto shed $1.95.

Qantas gained eight cents and Telstra was two cents higher at $4.66.

The Australian dollar soared over 90 cents following the release of the latest inflation figures.

About 5:30pm (AEST), it was buying 89.4 US cents, 43 UK pence, 102 Japanese yen and 63 Euro cents.

A barrel of West Texas crude oil was fetching $US86.45 a barrel and spot gold was trading at $US756 an ounce. © 2007 Australian Broadcasting Corporation