The S&P/ASX200 fell 62.5 points on Monday, down 0.74 per cent, to 8,365.9, as the broader All Ordinaries lost 75.7 points, or 0.88 per cent, to 8,552.6.
Both indices fell into correction territory in the morning - down more than 10 per cent from recent record highs - while the basic materials sector is in a technical bear market, down more than a fifth from its peak.
The All Ordinaries has tumbled 9.3 per cent since the conflict began, wiping almost $300 billion from the index's combined value after the effective closure of the Strait of Hormuz lit a match under oil prices.
"When the world's most critical oil choke point becomes a public bargaining chip, there are few places to hide — and Australia's commodity-heavy market is feeling that more acutely than most," Vantage senior market analyst Hebe Chen told AAP.
"Basic materials stocks are caught in an especially cruel position — the same war that pushed oil higher is now threatening to slow the economies that consume Australia's iron ore, copper, and coal."
Gold prices tumbled to two-month lows near $US4,364 ($A6,258) an ounce, down from January's record $US5,595, pummelling ASX-listed gold miners like Evolution and Northern Star, which sunk seven per cent or more.
Mega miners BHP and Rio Tinto were also heavy, with Rio down 1.7 per cent to $144.41 and BHP fading 0.8 per cent to $47.11, despite iron ore futures holding steady near $US107.
Energy and utilities stocks performed well, each segment up 1.2 per cent or more as Woodside, Santos and Origin rallied, while coal and uranium producers were mixed.
The owners of Australia's two remaining crude oil refineries, Ampol and Viva, both posted gains after the federal government flagged subsidies last week to keep plants running at times when costs outweigh fuel prices.
Airlines were under heavy selling pressure, with Virgin Australia plummeting 8.2 per cent and Qantas down 2.3 per cent, as jet fuel costs spiral.
Of the two, only Virgin operates direct flights to the Middle East.
The big four banks weighed heavily on the bourse, led by a 1.8 per cent slump in NAB shares to $44.74.
NAB's share price has underperformed its major competitors since Morgan Stanley named the bank as most at risk of a significant downgrade in a research note last week.
In company news, ARN Media dived 4.6 per cent to 31.5 cents as Kyle Sandilands launched legal action over the termination of his $100 million contract after the Kyle and Jackie O Show was pulled off air.
The broader market slump could have further to go, with AMP forecasting for a correction of about 15 per cent from recent highs, the group's chief economist Shane Oliver said.
"Our base case is that the war and oil shock will be relatively short as Iran will not be able to keep the Strait closed indefinitely and Trump will look for an off-ramp as political pressure builds ahead of the midterms," Dr Oliver said.
"But it could still go on for weeks yet and so could still see oil prices rise more in the interim say to $US150."
Brent crude oil has soared from around $73 a barrel in February to as much as $US119.44, and is now trading near $US112.
The Australian dollar is buying 69.63 US cents, down from 70.86 US cents on Friday at 5pm, fading against greenback strength.
ON THE ASX:
* The S&P/ASX200 dropped 62.5 points, or 0.74 per cent, to 8,365.9
* The broader All Ordinaries fell 75.7 points, or 0.88 per cent, to 8,552.6
One Australian dollar trades for:
* 69.63 US cents, from 70.86 US cents at 5pm AEDT on Friday
* 111.11 Japanese yen, from 112.25 Japanese yen
* 60.36 euro cents, from 61.32 euro cents
* 52.34 British pence, from 52.87 British pence
* 120.03 NZ cents, from 120.54 NZ cents
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