The monthly consumer sentiment survey from Westpac and Melbourne Institute revealed a 6.9 per cent fall in February after consumers reported feeling more optimistic in December and January.
The fall to 78.5 marks the second-lowest reading in the survey's near 50-year history, with lower scores recorded in November 2022 and April 2020.
The monthly indicator also dropped off sharply after the central bank hiked interest rates by another 25 basis points last week, falling from 83.5 to 74.8.
Westpac senior economist Matthew Hassan said the strong December consumer price index and the continuation of the Reserve Bank of Australia's tightening cycle had dashed hopes of easing cost of living pressures.
He said the February result was only slightly higher than at the start of the pandemic and below the low point of the global financial crisis.
"Prior to that, we need to go back to the deep recession in the early 1990s to find weaker index readings," he said.
The index revealed an eight per cent drop in "family finances versus a year ago".
Households are no more optimistic about the year ahead, with the "family finances, next 12 months" sub-index falling 6.7 per cent.
Mortgage holders were markedly more pessimistic than other groups across both these metrics.
Confidence in the jobs markets remains in positive territory but is starting to soften, with more consumers expecting an uptick in unemployment soon.
The weekly consumer confidence index assembled by ANZ and Roy Morgan also plummeted in the wake of the latest RBA rate hike, sinking 5.5 points to 78.1, its lowest level since early April 2020.
The sharp drop in consumer sentiment follows a 3.2 point dip the week before.
ANZ senior economist Adelaide Timbrell said this was the sharpest weekly drop in confidence since the RBA kicked its rate hikes up a gear to 50 basis points in June 2022.
"The average confidence among people paying off their mortgages fell sharper than other housing cohorts last week, by 10 points, to its lowest since early April 2020."
Households are bracing for higher mortgage repayments off the back of the Reserve Bank's latest cash rate hike, the ninth increase since May.
The central bank also flagged at least two more increases to bring down soaring inflation.
Assistant Treasurer Stephen Jones said there were particular concerns for the 800,000 mortgage holders on fixed rates who were yet to feel the full brunt of rising rates.
"We're hoping that we don't see further interest rate increases," he told ABC TV on Tuesday.
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