The benchmark S&P/ASX200 index was down as many as 127 points, or 1.4 per cent in the first hour of trading on Wednesday, but climbed steadily in the afternoon to finish just 18.8 points lower at 8,785.1, a drop of 0.2 per cent from Tuesday's close.
The All Ordinaries fell 25.4 points, or 0.28 per cent, to 8,979.3.
The rebound came even as Iran said it had launched attacks on 85 US military sites in Bahrain and Kuwait, in response to US air strikes targeting Iran's ports, missile and drone sites and air defences.
The US said it launched the "powerful" attacks in retaliation for the Islamic republic's alleged targeting of two tankers in the Strait of Hormuz.
IG analyst Tony Sycamore said the renewed hostilities highlighted how the June 17 memorandum of understanding between the US and Iran left important details on control of the Strait of Hormuz deliberately ambiguous.
Oil prices jumped, with Brent crude rising $US3 to a two-week peak of $US76.63 a barrel, propelling the ASX's energy sector 3.3 per cent higher.
Woodside grew 3.2 per cent, Santos climbed 5.8 per cent and Yancoal added 4.0 per cent.
Six of the ASX's 11 sectors finished higher, with five lower.
Telstra lost 3.0 per cent to a nearly five-month low of $4.92 as the mobile phone operator grappled with a massive outage.
GenusPlus Group dropped 8.1 per cent despite the Telstra contractor announcing it was not involved with and hadn't contributed in any way to the outage.
The heavyweight mining sector dropped 2.0 per cent, with BHP retreating 2.3 per cent to $57.51, Rio Tinto dropped 2.6 per cent to $163.85 and South32 dipping 1.0 per cent to $3.96.
Goldminers were lower as the yellow metal fell about $US40 to a six-day low of $US4,125 an ounce, with Evolution losing 4.2 per cent and Northern Star dropping 1.7 per cent.
Minerals 260 was the worst performer in the ASX200, sinking 16.5 per cent to a three-month low of 63.5c as the developer released plans for its proposed Bullabulling goldmine in WA's Goldfields region.
In the tech sector, WiseTech Global fell 7.3 per cent, giving back the previous day's gains and then some, following the resignation of founder Richard White as an executive director on Tuesday.
Elsewhere in the tech sector, Xero fell 1.2 per cent, Life360 dropped 2.0 per cent and Appen retreated 3.2 per cent.
In the consumer discretionary sector, Adairs dropped 1.3 per cent to $1.47 as the furniture seller said it would write off $62 million to $68 million in goodwill from its struggling Focus on Furniture business.
"The business is transitioning under new management, and trading has been subject to more aggressive competitor promotional activity," Adairs said.
The Australian dollar was buying 69.33 US cents, from 69.44 US cents at 5pm on Tuesday.
ON THE ASX:
* The S&P/ASX200 fell 18.8 points, or 0.21 per cent, to 8,785.1
* The broader All Ordinaries lost 25.4 points, or 0.28 per cent, to 8,979.3
One Australian dollar trades for:
* 69.33 US cents, from 69.44 US cents at 5pm AEST on Tuesday
* 112.49 Japanese yen, from 112.52 Japanese yen
* 60.70 euro cents, from 60.76 euro cents
* 51.89 British pence, from 51.90 pence
* 121.45 NZ cents, from 121.99 NZ cents
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