Australian shares closed down on Thursday, as losses in banking and technology stocks overshadowed a rally in mining and gold shares, while rare earths miner Arafura surged following a government funding plan of up to A$840 million ($555.6 million).

The S&P/ASX 200 index fell 0.2% to close at 7,713.600, following a 0.2% increase on Wednesday.

Prime Minister Anthony Albanese said Australia will provide loans for its first combined rare earths mine and refinery in the Northern Territory, owned by Arafura Rare Earths.

Shares of the critical minerals miner surged by a whopping 83.1% to end near A$0.3 apiece, logging their best day ever.

Local financials snapped a two-day winning streak, ending the day 1.9% lower, mainly led by losses in the "Big-Four" banks, especially Westpac, which led with a 3.9% drop, marking its worst day since May 4.

"Banks are trading at peak multiples without a clear fundamental reason," Macquarie analysts said in a note.

"We see limited scope for banks to surprise in the medium term and hence see limited fundamental reasons for a structural re-rating," they added.

The rate-sensitive financials have been performing well in the past few days, ending last week on an 8-months high. However, lenders are currently set for their worst week in over six months.

Traders are awaiting next week's Reserve Bank of Australia's monetary policy decision to gain insights into when the central bank might start cutting interest rates.

In the resource-heavy bourse, miners rebounded overnight to end 2.2% higher, recording their best day since Dec. 15.

Gold stocks added 2.2% as prices remained flat, with traders seeking clarity on potential rate cuts.

The consumer stocks rose 0.6%. Myer Holdings ended 7.6% higher after the department store operator appointed former Qantas Airways loyalty business boss as its MD and CEO.

New Zealand's benchmark S&P/NZX 50 index traded flat, closing the session at 11,808.3300. ($1 = 1.5119 Australian dollars) (Reporting by Rajasik Mukherjee; Editing by Dhanya Ann Thoppil)