The S&P/ASX200 fell 83.4 points by midday AEDT on Tuesday, down 0.91 per cent, to 9,117.5, as the broader All Ordinaries lost 87.2 points, or 0.92 per cent, to 9,338.3.
The Middle East conflict's impact on global equities markets had so far been limited, Capital.com senior market analyst Kyle Rodda said.
"The markets are treating the war between the US, Israel and Iran as a significant but relatively manageable and brief supply shock," he said.
"The big macro risk to the markets appears to be the impact higher oil prices could have on inflation and interest rates."
West Texas crude prices have eased to roughly $US71 a barrel, a 5.5 per cent premium to Friday's price, after spiking almost nine per cent just after the weekend attacks.
Ten of 11 local sectors were trading lower on Tuesday, while energy stocks eked a less-than 0.1 per cent lift as Woodside and Santos rolled over but coalminers and uranium producers went higher.
Speaking about the Middle East conflict, Reserve Bank governor Michele Bullock said it was too early and the matter too complex to know its likely economic impact on Australia.
"A supply shock of this nature, for example, could add to inflation pressures, and the potential implications for inflation expectations also are something that we're very alert to," Ms Bullock told the AFR Business Summit on Tuesday.
"At the same time, a prolonged impact on energy markets could have adverse effects on global economic activity and resulting downward pressure on inflation."
Basic materials weighed on the bourse, down 1.1 per cent and heading for the red-hot segment's first negative session out of the past seven, which reset multiple record highs along the way.
BHP slipped from its own new peak to trade at $59.01, while Rio Tinto and Fortescue also fell as iron ore futures slipped below $US100 a tonne after spiking in the wake of the weekend's attacks.
ASX-listed gold stocks were in the red despite the precious metal hanging on to most of its recent gains to trade hands at $US5,356 an ounce.
Capstone Copper tumbled more than five per cent despite posting record production and earnings, and reaching a strike-ending labour deal.
Producers of critical minerals - key to defence technology - were mixed after rallying on Monday, echoing similar dips in local defence stocks that potentially overestimated the boon from the Middle East conflict.
Droneshield and shipbuilder Austal each lost more than 4.2 per cent after surging in the prior session.
The heavyweight financials sector was quiet after dipping sharply at the start of the week, with the big four banks trading either side of break-even.
Elsewhere in the segment, major insurers QBE, IAG and Suncorp were down 1.3 per cent or more as flights were cancelled and airspace closed around the Middle East, while leading maritime insurers scrapped war risk cover for oil and gas tankers operating in the Gulf.
At least 150 vessels including oil and LNG tankers have dropped anchor in or around the Straight of Hormuz after Iran threatened to destroy any ship that attempted to pass the key shipping route.
Industrials stocks dropped for a second day, with Qantas down almost nine per cent over the two sessions despite no direct impact on its routes, as the airline offers "additional flexibility" for customers who booked flights, to, from or via the UAE, Qatar, Israel, Jordan and Oman through partner airlines.
Consumer discretionary stocks and real estate trusts also dipped sharply, Â along with healthcare stocks, staples, communications stocks and IT companies, which handed back an early lead.
Family tracking app Life360 was a stand out, falling almost seven per cent despite delivering its maiden annual profit, which was boosted by a one-off tax benefit.
The Australian dollar is buying 71.01 US cents, up from 70.77 US cents on Monday at 5pm AEDT, as safe-haven buying of the greenback tapered off.
23°C