The S&P/ASX200 spiked more than 150 points in early trade on Tuesday, but the lead faded to 93.6 points by the close, up 1.09 per cent, to 8,692.6.
The broader All Ordinaries gained 100.6 points, or 1.14 per cent, to 8,924.2, clawing back just over a third of Monday's $90 billion wipe out.
The bounce came after US President Donald Trump claimed the Iran conflict was ahead of its initial four-to-five week timeline and after G7 finance ministers considered, but ultimately held off, tapping oil reserves to shore up crude supply.
Tuesday's rebound had been slightly disappointing, IG market analyst Tony Sycamore said.
"A strong start, it came out of the blocks absolutely swinging, hoping to take back some of that $90 billion worth of damage that was done yesterday," he told AAP.
However, signs President Trump was potentially looking to de-escalate the conflict soon were encouraging.
"He does have the mid-terms coming up, and it won't look good if equity markets are getting poleaxed, and if inflation is going through the roof," Mr Sycamore said.
"It's great that there is now an off-ramp of sorts, but it doesn't quite fit the narrative yet that we we are heading towards a lasting peace."
Oil prices have been volatile, with Brent trading near $US91 a barrel after spiking above $US115 overnight, but still up more than 28 per cent since the conflict began.
Nine of 11 local sectors ended the session higher, as energy stocks tumbled 2.9 per cent and consumer staples faded 0.3 per cent.
Oil and gas giants Woodside and Santos each fell 3.5 per cent or more, while coal producers sold off but uranium stocks recovered from recent down ticks.
The raw materials sector snapped a five session losing streak with a 1.9 per cent bounce, as BHP shares rebounded to $51.23.
Gold stocks were broadly higher, as the precious metal edged up to $US5,169 ($A7,320) an ounce, boosting the All Ordinaries sub industry roughly two per cent.
The heavyweight financials sector jumped 1.3 per cent, shrinking from a 1.8 per cent advance at midday, as Westpac led all big four banks higher.
Consumer discretionaries, IT and health care stocks also performed strongly, thanks in part to strong company level performances from Wesfarmers, JB Hi-Fi, Telix, Life360 and Telix Pharmaceuticals.
The spike in oil prices has given the Reserve Bank a lot to consider ahead of its meeting next week, but there was a strong case to hold off on any further hikes until May, AMP chief economist Shane Oliver said.
"The case for higher rates is that inflation is already above target and a further big boost to headline inflation to above 4 per cent will threaten higher inflation expectations," Dr Oliver said.
"The case to hold is that the boost to inflation may be brief if the war ends in the next few weeks and the negative impact on demand in the economy could lead to lower underlying inflation."
The Australian dollar is buying 70.77 US cents, up from 70.09 US cents on Monday at 5pm.
ON THE ASX:
* The S&P/ASX200 rose 93.6 points, or 1.09 per cent, to 8,692.6
* The broader All Ordinaries gained 100.6 points, or 1.14 per cent, to 8,924.2
CURRENCY SNAPSHOT:
One Australian dollar trades for:
* 70.77 US cents, from 70.09 US cents at 5pm AEDT on Friday
* 111.56 Japanese yen, from 111.04 Japanese yen
* 60.89 euro cents, from 60.63 euro cents
* 52.66 British pence, from 52.60 British pence
* 119.61 NZ cents, from 119.06 NZ cents
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