The benchmark S&P/ASX200 index fell as many as 84.4 points, or 1.0 per cent, in late morning trading on Monday, but climbed steadily throughout the afternoon to finish down 30.6 points, or 0.36 per cent, at 8,474.9.
The broader All Ordinaries finished the day down 35.5 points, or 0.41 per cent, at 8,688.
IG market analyst Tony Sycamore said the mood was one of caution as traders awaited further details on what Iran's response would be after B-2 stealth bombers struck three Iranian nuclear sites on Saturday.
Iran's representative to the UN Security Council, Amir Saeid Iravani, told the body the Islamic Republic reserved the right "to defend itself" against "blatant US aggression", adding that the timing and nature of Iran's "proportionate response" would be decided by its armed forces.
Seven of the ASX's 11 sectors finished lower, with telecommunications and utilities basically flat and energy and financials slightly higher.
Industrials was the biggest loser, dropping 1.4 per cent as logistics company Brambles retreated 5.0 per cent and Qantas dropped 1.9 per cent, potentially on concerns the conflict could affect travel and shipping.
In the energy sector, Santos climbed one per cent while Woodside was flat as Brent crude rose $US2 to over $US78 a barrel, near its highest level since late January.
In the heavyweight mining sector, BHP dropped 1.6 per cent to $35.64, Fortescue retreated 1.0 per cent to $14.54 and Rio Tinto dropped 0.3 per cent to $101.83.
The big four banks were mixed, with ANZ down 0.6 per cent to $28.21 and NAB edging 0.1 per cent lower to $38.88, while Westpac rose 0.6 per cent to $33.42 and CBA gained 1.0 per cent to $184.35.
In the consumer discretionary sector, Adairs plunged 20.5 per cent to an over two-month low of $2.05 after the furniture retailer announced trading had been challenging for its Focus on Furniture business, which has had to engage in high levels of discounting to stimulate sales.
Smartpay Holdings climbed 9.6 per cent to $1.03 after the dual-listed EFTPOS provider agreed to be acquired by US-based Shift4 Payments for $274 million, or $NZ1.20 ($1.11) a share.
Metcash rose 2.7 per cent to $3.80 after the IGA, Total Tools and Mitre 10 supplier posted a $283.3 million full-year profit, up 10.1 per cent from a year before, led by strong performance across its supermarket business.
The Australian dollar was buying 64.22 US cents, from 64.76 US cents at 5pm on Friday.
Looking forward, Virgin Australia is expected to return to the bourse on Tuesday under the ticker code VGN.
ON THE ASX:
* The benchmark S&P/ASX200 index finished Monday 30.6 points lower, or 0.36 per cent, to 8,474.9
* The broader All Ordinaries lost 35.5 points, or 0.41 per cent, to 8,688.0
CURRENCY SNAPSHOT:
One Australian dollar buys:
* 64.22 US cents, from 64.76 US cents on Thursday at 5pm
* 94.47 Japanese yen, from 94.13 Japanese yen
* 55.82 euro cents, from 56.24 euro cents
* 47.77 British pence, from 48.09 pence
* 108.26 NZ cents, from 108.05 NZ cents
