Hundreds of people, including civilians, have been killed in the days since Israel launched a surprise assault on Iranian nuclear and military sites.
The two nations have since exchanged air and missile strikes, with Iran vowing to "open the gates of hell" against its sworn enemy.
As analysts watch the unfolding violence with concern, leaders are also flagging shocks to the global economy.
Treasurer Jim Chalmers said there had already been substantial economic consequences, pointing to a spike in the cost of oil.
"This is a perilous moment for the Middle East, and it's a perilous moment for the global economy as well," he told ABC News.
"Now this obviously poses two kinds of risks.Â
"Higher oil prices do pose a risk to the inflation outlook, but they also pose a risk to global growth."
Dr Chalmers said despite the events, the market's expectations for interest rate cuts in Australia had increased rather than decreased.
"What that tells us is that the market is more focused on the implications for global growth," he said.
Australia's defence force chief, Admiral David Johnston, called for restraint and for all countries to pursue a diplomatic solution.
"The recent strikes between Israel and Iran represent a deeply concerning escalation," he told a News Corp defence summit in Canberra.
"The risk of further regional instability is severe, particularly recognising ongoing volatility across the Middle East region in Gaza, Syria and Yemen."
Admiral Johnston said all Australian Defence Force personnel assigned to the region were safe, and Defence would continue to monitor events and provide for their protection.
Foreign Minister Penny Wong said on Monday 350 Australians had registered for help to flee Iran, while 300 had asked for assistance in Israel.
Overnight, Iran said more than 224 Iranians have been killed, most of them civilians, since the conflict began on Friday.
In Israel, 24 people have been killed so far in Iran's missile attacks, all of them civilians.
"I think many people wake up in the morning, they open their phone, they have a look at the news, and they are deeply, deeply unsettled," Greens senator David Shoebridge told Nine's Today show on Tuesday.
Liberal senator Dave Sharma, a former Australian ambassador to Israel, said the end game for Israel was an Iran that can no longer threaten it with annihilation.
"This is a country that has been hell bent on their destruction for at least the last two decades, that's ideologically committed to wiping out Israel," he added.
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