The S&P/ASX200 fell 143.6 points by midday, down 1.62 per cent, to 8,734.5, as the broader All Ordinaries lost 137 points, or 1.5 per cent, to 8,970.7.
The local market had rallied over the past two sessions on hopes of de-escalation of the US conflict with Iran, but a firm peace deal looks elusive, IG market analyst Tony Sycamore said.
"Tensions flared again this morning after reports of US strikes on targets in southern Iran, including the key oil port of Bandar Abbas and Qeshm Island," he said.
Iran responded by targeting US vessels in the eastern Strait of Hormuz, vowing to retaliate against any further attacks.
"This continues the recent pattern of escalation into weekend before de-escalation, ahead of the reopening the following week," Mr Sycamore said.
Despite Friday's fall, the local exchange remains on track to narrowly break a three-week losing streak after rebounding strongly on Wednesday and Thursday.
The heavyweight financials sector was weighing heavily heading into the weekend, dipping 2.3 per cent, tracking tumbles in the big four banks.
Investment giant Macquarie Group fell 1.9 per cent to $236.50 despite delivering an eye-watering $4.8 billion net profit in the year to March, up 30 per cent on its 2025 financial year.
Miners also dragged, with basic materials falling 1.6 per cent as BHP, Rio Tinto and Fortescue handed back some of the previous two sessions' gains.
Gold miners edged lower as the precious metal hovered near $US4,720 ($A6,546) an ounce.
Even energy and utility stocks weren't spared from the sell-off despite an increase in oil prices, each sector tumbling one and two per cent respectively by lunchtime.
Consumer-facing stocks were also in the red, as Wesfarmers, Woolworths and Coles fell.
Real estate stocks tumbled two per cent in a broad-based dump that wiped the previous two sessions' gains in the first hour of trade.
There were a handful of companies that dodged the sell-down, with real estate.com.au owner REA Group up 3.4 per cent to $180.39 after posting strong earnings growth in the third quarter.
News Corporation charged more than four per cent higher after its revenue jumped to $US2.2 billion in the three months to March, up nine per cent on the same quarter in 2025, putting it on track for a record full-year profit.
Tabcorp fell for a second day after flagging an AUSTRAC investigation into potential money-laundering obligation breaches, with its share price plunging almost 30 per cent in two sessions.
The Australian dollar is buying 72.09 US cents, down from 72.50 US cents on Thursday at 5pm, as souring risk sentiment supported the greenback.
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