The benchmark S&P/ASX200 index on Friday fell 37 points, or 0.43 per cent, to 8,665, its lowest level since June 11, while the broader All Ordinaries dropped 51.4 points, or 0.58 per cent, to 8,845.6.
The ASX finished the week down 0.8 per cent, its fourth straight week of losses, and is also now down 0.6 per cent since the start of the year.
Overnight, a military adviser to Iran's leadership said that further attacks by the US and Israel could prompt the Islamic Republic to expand the war as far as the Indian Ocean, sending Brent crude to an eight-day high of $US106 a barrel.
Interactive Brokers senior economist Jose Torres said that the higher oil prices were sparking share market turbulence, as investors feared they would fuel above-average inflation.
Meanwhile, Australian government bond yields were close to surpassing last week's 15-year peak, tracking similar moves overseas, as investors demanded higher returns for holding government debt.
What some have described as a bloodbath in the bond market has been putting pressure on equities, as higher returns from bonds make riskier assets less attractive.
Nine of the ASX's 11 sectors finished lower, with financials and consumer staples higher.
The tech sector was the biggest mover, dropping 1.7 per cent, as Xero fell 2.8 per cent, Wisetech Global dropped 2.3 per cent and NextDC retreated 1.8 per cent.
The consumer discretionary sector declined 1.4 per cent amid firming expectations that the Reserve Bank will raise interest rates next week.
Eagers Automotive dropped 4.7 per cent, JB Hi-Fi retreated 2.8 per cent and Nick Scali subtracted 3.7 per cent.
Netwealth was the biggest loser in the ASX200, slumping 8.2 per cent to a two-and-a-half-year-low of $17.02 as the portfolio administration company was hit by a class action filed in connection with the collapsed First Guardian super fund.
Netwealth said it had already paid $101 million to affected members and would defend itself from the lawsuit.
Elsewhere in the financial sector, all of the big four banks finished higher.
CBA gained 0.6 per cent to $150.83, NAB rose 1.0 per cent to $38.54 and both Westpac and ANZ advanced 1.1 per cent, to $34.49 and $37.84, respectively.
In the heavyweight mining sector, BHP dropped 0.5 per cent to $60.72, Fortescue retreated 2.3 per cent to $16.37 and Rio Tinto lost 1.0 per cent at $164.85.
Meeka Metals dropped 25.9 per cent to 10 cents after the WA gold developer raised $40 million from institutional investors at a similar valuation.
The Australian dollar was changing hands for 70.24 US cents, from 70.35 US cents at 5pm on Thursday.
ON THE ASX:
* The S&P/ASX200 dropped 37 points, or 0.43 per cent, to 8,665.
* The broader All Ordinaries fell 51.4 points, or 0.58 per cent, to 8,845.6.
One Australian dollar trades for:
* 70.24 US cents, from 70.35 US cents at 5pm AEST on Thursday
* 111.03 Japanese yen, from 111.45 Japanese yen
* 61.70 euro cents, from 61.78 euro cents
* 53.11 British pence, from 53.12 pence
* 123.98 NZ cents, from 123.97 NZ cents
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