The Australian dollar plunged to a new 4-1/2-year low on Monday as a group of people were held hostage in a Sydney cafe by a suspected terrorist adding to the risk averse mood of the markets also underpinned by a weaker than expected tankan survey from Japan.

According to Australian police, an armed assailant was holding an unknown number of hostages inside a central Sydney cafe on Monday, while a local television showed some being forced to hold up a black flag with white Arabic writing in the window, Reuters reported.

AUD/USD dropped to 0.8203, its lowest since June 2010, and 50 pips down from Friday's close. The main share index S&P/ASX 200 was down 0.6%.

Businesses have been concerned about the progress of Christmas shopping being dampened by the hostage crisis, according to local media.

Meanwhile, the USD index edged higher to 88.43 from 88.33 showing the market interest in the safety of the dollar.

The Japanese yen was stuck to a narrow range of 117.80-119 amid various domestic and international developments but the over 1% drop in Nikkei showed the loss of risk appetite among equity investors there.

The Japanese tankan survey for the fourth quarter showed a large manufacturing outlook index of 9, sharply lower than the previous quarter's 13 and against the consensus of a rise to 14.

At the same time, Prime Minister Shinzo Abe came back to power with a two-third majority for his coalition government in the snap election held over the weekend.

Asian equity markets remained risk averse amid the Australian and Japanese developments with the major focus now shifting to the Federal Reserve policy review on Wednesday.

Data from Australia on Monday showed that the sales of new motor vehicles fell 3.8% from a year earlier in December steeper than the November fall of 0.5%.

The coming week is light with regards to Australian data. On Tuesday, the Reserve Bank of Australia will publish the minutes of the last policy meeting, and on Thursday, the monthly bulletin.