Australian shares slipped on Monday after U.S. President Donald Trump threatened "major retaliation" against Iran amid a flare-up of tensions in the Middle East, driving cautious investors towards safe-haven assets.
Most sectors in the benchmark index traded sharply lower, with a strong performance among gold stocks just managing to rein in deeper falls.
Earlier in the session, the S&P/ASX 200 index <.AXJO> dived nearly 1%, but retraced losses to trade 45.5 points or 0.7% lower at 6,688.6 by 0030 GMT.
A U.S. airstrike in Baghdad on Friday killed Qassem Soleimani, Iran's most prominent military commander. Iran vowed to avenge the killing, prompting the United States to threaten "major retaliation" against Tehran if they were to retaliate.
"Markets are reacting to the fact that there may be a drawn-out conflict between the U.S. and Iran. Investors are taking a step back to assess what the potential outcome is, because both sides have come out with some harsh words," said James Tao, market analyst at CommSec.
While Australian markets were hovering close to record highs, global investor sentiment also got a boost from the latest updates on Sino-U.S. Phase 1 trade deal, making equities more susceptible to shocks now, Tao said.
Financials <.AXFJ> slumped 1.2%, with the country's biggest lenders Commonwealth Bank of Australia <CBA.AX> and National Australia Bank Ltd <NAB.AX> down 1.2% each.
Australia and New Zealand Banking Group <ANZ.AX> dived 1.1%, while Westpac Banking Corp <WBC.AX> fell nearly 1%.
Heavyweight miners BHP Group <BHP.AX> and rival Rio Tinto <RIO.AX> shed 0.6% and 1.2%, respectively.
Mounting Middle East tensions sent safe-haven bullion to its highest in almost seven years, with the Australian gold index <.AXGD> rising 2.2% to their strongest in two months. Top miner Newcrest Mining <NCM.AX> gained 2.9%, while AngloGold Ashanti <AGG.AX> advanced 2.6%.
Limiting further losses in the index were energy stocks <.AXEJ>, which gained as the turmoil also stoked worries about global crude supply and lifted oil prices to nearly four-month peaks.
Woodside Petroleum <WPL.AX> gained as much as 1.5%, while Santos <STO.AX> rose 1.6%. The relatively smaller Beach Energy <BPT.AX> added 1.2% to the index.
However, the rally in crude prices, which are among the biggest costs for an airline, played spoilsport for Qantas Airways <QAN.AX> and Virgin Australia Holdings <VAH.AX>, with shares shedding 3.9% and 3.2%, respectively.
Elsewhere, New Zealand's benchmark S&P/NZX 50 index <.NZ50> fell 0.5% or 54.56 points to 11,538.58.
Air New Zealand <AIR.NZ> was among top losers, down 2.1%, while dairy giant a2 Milk Company <ATM.NZ> lost 1.2%.
(Reporting by Rashmi Ashok in Bengaluru, Editing by Sherry Jacob-Phillips)
