The S&P/ASX200 fell 111.2 points by midday, down 1.27 per cent, to 8,674.5, as the broader All Ordinaries lost 110.9 points, or 1.23 per cent, to 8,906.3.
The slump followed a weak session on Wall Street after a record-breaking rally in US tech stocks ran out of steam.
"Financial markets shifted back into a risk-off mode as the US and Iran exchanged fire again," Westpac economist Mantas Vanagas said.
"With military action intensifying and tensions over Israel's campaign in Lebanon rising, the two countries appear to be moving further away from common ground on a lasting agreement."
In a positive sign, Israel and Lebanon have agreed to implement a ceasefire provided Hezbollah halts attacks on Israel, which could lead to a resumption of talks between the US and Iran.
Energy and utilities stocks rose as Brent crude hovered near $US97 a barrel, while traditionally defensive sectors, health care and consumer staples, also improved.
Ampol and Viva Energy advanced, with Ampol up more than two per cent to $35.79 after Macquarie raised its target price on the refinery operator to $46.50.
Miners were heavy, with basic materials tumbling 3.1 per cent, tracking with BHP and Rio Tinto, as the sector retreated from Tuesday's record-breaking runs.
The miners' respective drops came as iron ore futures tumbled to 12-week lows after exports from Rio's Simandou mine in Guinea surged in May, six months after its first shipment to China.
Gold miners were also under pressure, as the metal slipped to $US4,464 ($A6,260) an ounce, while battery minerals and rare earths producers also fell.
Financials tipped one per cent lower as all four big banks and Macquarie lost ground, but insurers managed to carve out some modest gains.
Meanwhile, real estate stocks have fallen 2.8 per cent for the week as investors continue to mull a cooling property market and the impacts of proposed federal tax reforms on future investment.
Consumer discretionaries are on track to snap a three-session losing streak with a somewhat unconvincing 0.1 per cent rebound.
In company news, Pro Medicus gained 0.7 per cent to $160.81 after announcing its third contract win this week.
Treasury Wine Estates soared by more than a tenth after reaffirming its 2026 financial year guidance and flagging plans to slash its portfolio from 76 brands to less than 30.
Shares in alcohol and hotels giant Endeavour jumped more than three per cent $2.96 after an upgrade from investment behemoth Citi, which raised its target price to $3.25.
The Australian dollar was buying 71.30 US cents, slipping from 71.59 US cents on Wednesday at 5pm.
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