The main S&P/ASX200 index shed 24.8 points by midday on Monday, to be down 0.28 per cent to 8,781.2, as the broader All Ordinaries lost 27.1 points, or 0.3 per cent, to 8,976.6.
"Over the weekend, Iran and the US traded threats and the US commenced a third wave of strikes on military targets along Iran's coastline to further reduce Iran's capacity to threaten ships in the Strait of Hormuz," Westapc economist Ryan Wells said.
Brent Crude is trading above $US79 a barrel, putting it on par with the first days of the Persian Gulf conflict in early March.
US officials have denied Iranian claims that the Strait of Hormuz is closed, despite shipping traffic appearing to be at a standstill.
Local energy stocks gained 0.5 per cent as Woodside advanced to $29.35, while Santos was flat and coal miners lost ground.
Refinery operator Ampol surged almost three per cent after finalising a $400 million flexible loan facility, supported by investment giant KKR with assistance from Clifford Capital Asset Management.
Mining stocks were again under pressure after Friday's reprieve, slipping 0.5 per cent as gold miners fell and the precious metal eased to $US4,080 ($A5,887) an ounce.
Mega miners BHP, Rio Tinto and Fortescue made meagre gains as iron ore and copper prices held roughly steady, while BHP has called on the Fair Work Commission to assist bargaining ahead of a planned union strike at Port Hedland in Western Australia.
Vault Minerals slipped 0.6 per cent after Regis Resources walked away from its $4.7 billion takeover bid for the gold miner, following an unsolicited $5.6 billion offer from Genesis Minerals.
The financials sector edged 0.1 per cent higher on a mixed performance from the big four banks, with ANZ out front with a 0.4 per cent boost to $36.21.
IT stocks underperformed the other sectors in a broad-based slump, led by a 3.6 per cent drop in Xero after chief executive Sukhinder Singh Cassidy unloaded almost $2.2 million in stock, a change of CEO's interest notice showed.
In other company news, three suitors have emerged with plans to take over oOh!Media, as the outdoor advertising group revealed it is providing due diligence access to Pacific Equity Partners, I Squared Capital and Oaktree Capital.
Regis Healthcare chief financial officer Rick Rostolis is set to retire at the end of August, and the aged care provider has begun a process to find his replacement.
Outside of geopolitical news, investors are awaiting a raft of US earnings announcements, testimony from US Federal Reserve chair Kevin Warsh and US consumer and producer inflation data.
The Australian dollar was buying 69.35 US cents, down slightly from 69.50 US cents on Friday at 5pm.
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