The S&P/ASX200 jumped 177.7 points by midday Wednesday, up 2.13 per cent, to 8,557.6, as the broader All Ordinaries rose 192.5 points, or 2.25 per cent, to 8,763.8.
A ceasefire between the US and Iran is reportedly being discussed, with US officials offering a 15-point proposal to end the war.
Despite the reports, thousands of US troops are heading to the region, with even more to be deployed, and Israel's plans to occupy southern Lebanon show no signs of slowing.
"While reports certainly suggest that peace talks are underway and progress is being made toward a ceasefire, the market remains firmly on edge, still needing concrete evidence that marine traffic is resuming unhindered through the Strait of Hormuz," IG market analyst Tony Sycamore said.
"While the rhetoric around de-escalation and dialogue is clearly welcome, the market has thus far has treated it more with cautious optimism rather than unbridled joy."
The Australian bourse extended its gains on Wednesday after February inflation data came in slightly cooler than expected, showing a slight easing in price growth before the US and Israel attacked Iran on February 28.
The recently beaten down basic materials sector jumped 4.2 per cent by midday, freeing it from its recent bear market territory as most miners flashed green.
Iron ore and copper juggernaut BHP surged more than three per cent to $49.99, as Rio Tinto and Fortescue also posted gains.
Rio is getting $2 billion in taxpayer subsidies to secure the future of its Boyne aluminium smelter in Queensland, in return for backing $7.5 billion in green energy investment in the state.
Gold miners rocketed higher as the precious metal price swelled to $US4,567 ($A6,522) an ounce, supercharging the All Ordinaries gold sub-industry more than seven per cent.
The yellow metal is still down by more than a fifth from January's $US5,595 record high.
Energy stocks tumbled as crude prices returned to earth, with the Brent benchmark trading near $US94 a barrel, down from more than $US113 on Monday.
Oil and gas giants Woodside and Santos weighed on the segment, each falling three per cent or more, while coal producers also eased and uranium producers clawed back some recent losses.
Qantas soared more than five per cent and Virgin lifted even higher on hopes the massively disruptive Persian Gulf conflict might end.
The heavyweight financials sector charged two per cent higher as the big four banks and Macquarie rose on improved sentiment and a rosier economic outlook.
Alternative lender Pepper Money dived at the open before recovering to a modest gain, after it walked away from a takeover offer from Challenger, which rallied 3.5 per cent.
Consumer discretionary stocks were strong, up two per cent in a broad-based rally.
The health care sector advanced 1.5 per cent, with 4D Medical rocketing more than 36 per cent and outperforming the top-200, after inking a deal to deploy its software at US hospital non-profit Mayo Clinic.
The Australian dollar was buying 69.95 US cents, up from 69.66 US cents on Tuesday at 5pm.
While February's inflation print was softer than expected, the conflict in Iran would still be a key factor in the Reserve Bank of Australia's May interest rate decision, Oxford Economics Australia economist Yongshi Mai said.
"Australia was already grappling with persistent inflation before the Middle East conflict escalated," she said.
"The added pressure from higher energy, transport and fertiliser costs following the closure of the Strait of Hormuz has further darkened the outlook."
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