Australia shares post worst close in 4 months on slow recovery caution

* U.S. Fed pledges to continue support until economy rebounds

* All major Australian sub-indexes in the red

* Heavily shorted stocks outperform

* NZ’s benchmark index closes over 2% lower (Updates to close)

Jan 28 (Reuters) - Australian shares ended lower on Thursday to record their worst session in four months, after U.S policymakers’ indication of a concerning slowdown in the pace of the economic recovery unnerved investors and sparked a sell-off on the Wall Street.

The S&P/ASX 200 index dropped 1.9% to close at 6,649.7 points, marking its worst session since Sept. 30, 2020.

Major Wall Street indexes suffered substantial losses overnight, after the U.S. Federal Reserve left its significant overnight interest near zero and left its monthly bond purchases unchanged, pledging to keep the support intact until a full economic rebound is in motion.

“At the end of the day, the economy will slow down without stimulus, (and) without the vaccine rollout and without some sort of solution to the COVID-19 crisis, which is still in some way off,” said Henry Jennings, senior analyst at Marcustoday Financial Newsletter.

Back home, technology stocks were the biggest drags in the index, losing 4.8%, with Australian software-as-a-service company Xero leading the losses.

On the other hand, heavily shorted stocks such as Webjet , InvoCare and Inghams Group climbed, as investors looked to cover their short positions, after a pile-on of bets by amateur investors on video game retailer GameStop Corp squeezed U.S. hedge funds that were bearish on the stock.

Miners fell 2.7%, with the world’s fourth-largest iron ore miner Fortescue Metals Group slumping 4% and hitting its lowest in nearly 1-1/2 months.

The miner said in a quarterly update earlier in the day that it expected sustained demand from China for iron ore, while signalling potential higher costs at its Iron Bridge project.

Financial stocks also closed the session lower, with the so-called “Big Four” banks losing between 0.92% and 1.69%.

All major sub-indexes closed the session in the red.

New Zealand’s benchmark S&P/NZX 50 index finished 2.2% lower at 13,086.46 points.

Power generator and retailer Meridian Energy lost 7% and was the top loser in the benchmark. (Reporting by Harish Sridharan in Bengaluru, Editing by Sherry Jacob-Phillips)