The benchmark S&P/ASX200 index on Friday finished down 74.8 points, or 0.98 per cent, to 7,567.3, a weekly loss of 2.8 per cent.
The broader All Ordinaries fell 81.5 points, or 1.03 per cent, to 7,817.4.
Reports of Israeli missile strikes on Iran rattled investor confidence and put the share market on track for a correction, AMP chief economist Shane Oliver said.
"The huge gains in share markets since their October lows left them technically overbought," he said.
Stretched valuations and high levels of investor optimism meant equities were vulnerable to a bout of volatility, which now seems to be playing out, Dr Oliver said.
Concerns lingering US inflation would push back Federal Reserve interest rate cuts were exacerbated by fears of an escalation in the Middle East threatening global oil supplies.
"In terms of the latter, Iran produces about three per cent of global oil supply and about 20 per cent of global oil flows through the Strait of Hormuz, both of which could be threatened by a war involving Iran," Dr Oliver said.
Bonds, gold and oil prices all climbed as investors fled equities in search of a safe haven.
Domestically, interest rate markets are no longer pricing in an cut before the end of the year, with continuing strength in the jobs market adding to the case for the Reserve Bank to keep rates higher for longer.
Every official ASX sector finished in the red, with energy stocks the least affected.
The sector edged 0.1 per cent lower, buoyed by the rising oil price.
Woodside suffered a 31 per cent drop in revenue for the first quarter compared to the prior corresponding period, but chief executive Meg O'Neill was encouraged by progress on the oil and gas producer's three major growth projects.
Shares in Woodside finished 0.2 per cent lower after being up earlier in a day of whipsaw trading, while fellow fossil fuel giant Santos was 1.8 per cent higher.
Karoon Energy fell 5.4 per cent after downgrading its production outlook for 2024 due to lower forecasts at its Who Dat field in the Gulf of Mexico.
The Melbourne-based company recorded a six per cent quarter-on-quarter drop in first quarter sales revenue.
Miners more than reversed previous day's gains, with the sector falling 1.1 per cent.
Iron ore heavyweights BHP and Rio Tinto both sank one per cent while Fortescue Metals dropped two per cent.
Goldminers profited from the increased risk atmosphere as spot prices in the yellow metal built on already record highs.
Evolution Mining climbed 1.8 per cent to $4.07 while Northern Star firmed 1.3 per cent.
The Big Four banks were all in the red.
CBA slipped 0.8 per cent, Westpac fell 0.9 per cent, ANZ dropped 1.1 per cent and NAB finished 1.2 per cent lower.
Interest rate-sensitive tech stocks were the index's worst performing, down 1.6 per cent as a sector.
Logistics software provider WiseTech slumped 2.5 per cent and accounting software company Xero was 1.2 per cent lower.
The Australian dollar was buying 63.96 US cents, from 64.47 US cents at Thursday's ASX close.
ON THE ASX:
* The benchmark S&P/ASX200 index finished Friday down 74.8 points, or 0.98 per cent, at 7,567.3.
* The broader All Ordinaries fell 81.5 points, or 1.03 per cent, to 7,817.4.
CURRENCY SNAPSHOT:
One Australian dollar buys:
* 63.96 US cents, from 64.47 US cents at Thursday's ASX close
* 98.74 Japanese yen, from 99.46 Japanese yen
* 60.18 Euro cents, from 60.35 Euro cents
* 51.53 British pence, from 51.69 pence
* 108.82 NZ cents, from 108.85 NZ cents.
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