(Adds analysis, quotes, stocks on the move)
SYDNEY, Sept 4 Australian shares fell 0.7 percent, retreating from 3-1/2 month highs on Wednesday, as investors tread cautiously after the U.S. edged closer to military action against Syria, but a rally in gold prices helped temper losses.
Leading broadly-based losses were heavyweight stocks including banks and financials.
BHP Billiton Ltd fell 0.9 percent while Rio Tinto Ltd slipped 0.1 percent
Among banks, National Australia Bank lost 0.9 percent and Australia and New Zealand Banking Group dropped 1 percent.
The S&P/ASX 200 index fell 37.9 points to 5,158.7 by 0157 GMT, snapping four consecutive sessions of gains. The benchmark rose 0.2 percent on Tuesday to its highest close since May 20.
Risk appetite soured somewhat after key congressional leaders John Boehner and Eric Cantor both pledged their support for military action to punish President Bashar al-Assad for his suspected use of chemical weapons against civilians.
"In a worst case scenario of escalating conflict in the Middle East, higher risk premiums built into gold and oil prices could see a rally in energy and gold mining stocks, while the broader market falls," said Ric Spooner, chief market analyst at CMC Markets, in a note to clients.
Also dampening investor sentiment was the looming general election on Saturday, where the conservative opposition is expected to oust the Labor government, adding a cautious tone to trade during the week.
Top telecommunications company Telstra Corporation Ltd fell 0.9 percent while consumer staple retailers Woolworths Ltd and Wesfarmers Ltd lost 1.1 percent and 1.3 percent respectively.
However, a handful of gold miners edged higher, helping to cap broader losses after bullion rallied to near 3-1/2-year highs.
Regis Resources Ltd and Newcrest Mining Ltd posted gains of 2.1 percent and 0.7 percent, eking out a modest gain in the sector.
Data out on Wednesday showed Australia's economy grew 0.6 percent last quarter as modest gains in consumer and government spending offset a very flat performance else where.
"The economy is still growing below trend, ongoing growth is below 2.6 percent," said Stephen Walters, chief economist at JP Morgan.
"It probably means the RBA still has to cut interest rates at some point, but no compelling reason after this data to do anything soon."
Australia's central bank kept interest rates steady at 2.5 percent at its policy meeting on Tuesday.
Perilya Ltd rocketed 43.2 percent to 7-month highs of A$0.31 after Zhongjin Lingnan issued a proposal to acquire Perilya at $0.35 per share, a premium to its current trading share price.
Monadelphous Group Ltd climbed 2.8 percent to A$19.74, a three-month high after the company secured a $235 million Cape Lambert port project in Western Australia.
Sentiment on the local bourse was helped slightly as U.S. stocks edged higher on Tuesday, although they finished well off session highs.
New Zealand's benchmark NZX 50 index rose 0.1 percent to 4,612.7.
(Reporting by Thuy Ong; Editing by Eric Meijer)