The benchmark S&P/ASX200 index on Monday finished down 55.3 points, or 0.65 per cent, to a six-day low of 8,461.0, while the broader All Ordinaries also dropped 55.3 points, or 0.63 per cent, to 8,657.5.
The ASX200 was down by as many as 137 points in morning trading, but clawed back most of those losses in the afternoon to finish on the highs of the day.
The drop came as hundreds of US Special Operations forces arrived in the Middle East for a possible ground offensive, the latest indication that the war is unlikely to wind down anytime soon as it enters its second month.
Yemen's Houthi forces joined the conflict over the weekend, firing a salvo of missiles at "sensitive Israeli military sites" and saying they would continue fighting until Israel's aggression came to an end.
All eyes were on the Strait of Bab al-Mandeb, near Yemen, for signs whether the Houthis would seek to close that key shipping route between the Red Sea and the Indian Ocean the same way that Iran has blocked the Strait of Hormuz.
Brent crude surged as high as $US116.75 a barrel, a price it last traded at for a few weeks in mid-2022 amid the COVID reopening.
Crude had dropped under $US100 a barrel last week, when the war appeared to be de-escalating.
"Basically, everything is an oil trade and everyone is an oil trader right now," said Capital.com analyst Kyle Rodda.
Prime Minister Anthony Albanese said the government would halve the excise on fuel and diesel for three months to bring down costs for households.
Seven of the ASX's 11 sectors finished lower on Monday and four closed higher.
The tech sector was the biggest mover, dropping 3.2 per cent, as Wisetech Global retreated 4.8 per cent, Life360 shrunk 6.0 per cent and Technology One fell 3.0 per cent.
The financial sector lost 2.2 per cent, with CBA falling 2.8 per cent to $168.72, Westpac sliding 4.1 per cent to $39.09, NAB declining 1.8 per cent to $41.25 and ANZ dropping 1.6 per cent to $35.90.
The energy sector rose 2.3 per cent, with Woodside advancing 2.2 per cent, Santos adding 1.3 per cent and Whitehaven Coal rising 6.6 per cent.
The heavyweight mining sector gained 1.3 per cent, with Fortescue climbing 1.8 per cent to $20.55, South32 rising 9.4 per cent to $4.41 and BHP edging 0.1 per cent higher to $50.43.
Rio Tinto added 4.9 per cent to $160.78 after operations at its iron ore ports in the Pilbara resumed following impacts from Cyclone Narelle.
Gold miners were mostly higher as the precious metal changed hands at $US4,552 an ounce.
Northern Star added 5.2 per cent, Evolution rose 0.5 per cent and Greatland Resources climbed 11.1 per cent on an updated resource statement.
Elsewhere in the sector, Alcoa Corporation's ASX-listed shares rose 8.6 per cent to $93.33 after two Middle Eastern aluminium producers were hit by Iranian attacks.
The Australian dollar fell to a two-month low against its US counterpart, trading at 68.69 US cents, from 68.98 US cents around 5pm on Friday.
IG market analyst Tony Sycamore said the Aussie lost 2.1 per cent last week, its biggest drop since March 2025.
"As a risk-sensitive, pro-cyclical commodity currency, the Aussie has naturally found itself squarely in the crosshairs," Mr Sycamore said.
ON THE ASX:
* The S&P/ASX200 dropped 55.3 points, or 0.65 per cent, to 8,461
* The broader All Ordinaries fell 55.3 points, or 0.63 per cent, to 8,657.5
One Australian dollar trades for:
* 68.69 US cents, from 68.98 US cents at 5pm AEDT on Friday
* 109.67 Japanese yen, from 110.13 Japanese yen
* 59.65 euro cents, from 59.78 euro cents
* 51.74 British pence, from 51.71 British pence
* 119.65 NZ cents, from 119.53 NZ cents
19°C