The S&P/ASX200 narrowed a 131.6 drop to a 88.3 point fall by the close, down 0.97 per cent, to 8,978.4, while the broader All Ordinaries lost 100.6 points, or 1.09 per cent, to 9,160.3.
Brent crude prices topped $US97 a barrel for the first time since July as the US and Iran exchanged attacks, while bond yields hit multi-year highs with inflation concerns rattling investor nerves the size of economies' fiscal debts.
As fighting continued and hopes for a timely resolution to the war and resulting energy supply disruption faded, markets were finding it harder know where oil prices and the inflationary impact would peak, IG market analyst Tony Sycamore said.
"There doesn't seem to be an off-ramp," Mr Sycamore told AAP.
"We could be looking at this going on for another two days, another two weeks, another two months."
Miners were hit hardest, with the basic materials sector sinking 3.3 per cent as higher fuel price expectations and global growth concerns dragged on companies and commodity prices.
Gold fell to $US4,316 ($A6,045) an ounce, as the prospect of higher interest rates globally weighed on non-yielding assets.
Banking stocks staged a modest rebound after Australian June-quarter economic growth came in at 0.4 per cent, beating expectations but ultimately stagnant due to ongoing productivity shortfalls.
The resilient economic figure left the Reserve Bank facing an "ugly policy dilemma" ahead of its cash rate decision on September 29, Global X ETFs strategist Marc Jocum said.
"The lagged effects of previous rate hikes are still working through the economy, but inflation remains stubbornly high," Mr Jocum said.
"That could make for a tough second half of the year, with the uncomfortable spectre of stagflation looming large."
Sustainable economic expansion required productivity-led growth, strong exports and productive investment, he said.
NAB economists and TD Securities expect the RBA to hike the official cash rate to 4.6 per cent this month, while most analysts still expect the central bank to hold off until November.
Traditionally defensive consumer staples stocks outperformed the broader market, the sector up 0.8 per cent as Graincorp and Select Harvests rallied.
In company news, Telstra shares jumped almost two per cent despite a damning independent report into its July outage finding technical and staffing failures.
Corporate Travel Management has swung to a $17.7 million bottom-line profit in 2025/26 from a $348.5 million loss a year earlier, signalling a partial earnings recovery as it continued to remediate victims of its European division's post-pandemic overcharging scandal.
The Australian dollar is buying 71.39 US cents, down from 71.64 US cents on Tuesday at 5pm.
ON THE ASX:
* The S&P/ASX200 fell 88.3 points, or 0.97 per cent, to 8,978.4
* The broader All Ordinaries lost 100.6 points, or 1.09 per cent, to 9,160.3
One Australian dollar trades for:
* 71.39 US cents, from 71.64 US cents at 5pm AEST on Tuesday
* 113.96 Japanese yen, from 114.60 Japanese yen
* 61.72 euro cents, from 61.73 euro cents
* 52.91 British pence, from 52.90 pence
* 122.30 NZ cents, from 121.28 NZ cents
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