The S&P/ASX200 fell 11.6 points by midday on Monday, down 0.13 per cent, to 8,934.8, as the broader All Ordinaries dipped by 8.8 points, or 0.1 per cent, to 9,159.1.
"Reports that the US has seized an Iranian-flagged vessel in the Strait of Hormuz have escalated tensions, while conflicting signals around negotiations persist," Moomoo consultant Greg Boland said.
The US is pushing ahead with talks in Pakistan, but Iran has indicated no current plans to participate, criticising the ongoing US naval blockade of the strait.
"This creates a highly fluid backdrop as markets balance hopes of a deal with rising risks of further escalation," Mr Boland said.
Despite oil prices jumping higher over the weekend, the ASX-listed energy sector trailed the other 10 sectors and was down more than 2.6 per cent as oil, gas, coal and uranium producer stocks fell.
Refinery operator Viva Energy tumbled more than five per cent to $2.40 after coming out of a trading halt following a fire at its Geelong Refinery on Thursday.
The refinery will be producing diesel and jet fuel at around 80 per cent of capacity and petrol at around 60 per cent, before returning to 90 per cent capacity within a few weeks, Viva said in a statement.
Consumer-facing segments are outperforming the market, with discretionary stocks up 1.2 per cent, in part due to a strong rebound in Bunnings owner Wesfarmers, while the staples sector gained almost 0.8 per cent.
Woolworths and Coles each gained 0.8 per cent or more, ahead of the latter's court case brought by the competition watchdog, which has accused the two supermarket giants of using misleading discount pricing.
Industrials stocks also performed well, with Qantas up 0.7 per cent despite the renewed US-Iran tensions, while Virgin Australia fell 0.4 per cent and logistics provider Qube shrugged off an expected $10-$20 million hit from the conflict to edge 0.3 per cent higher.
Engineering and professional services company Worley wasn't so lucky, with its shares dropping 3.5 per cent to $11.41 after flagging an earnings impact of up to $40 million from the war.
The heavyweight financials sector was down as NAB tumbled more than three per cent as it flagged $706 million in impairment charges, including $201 million in adjustments for sectors likely to be hit by the fuel crisis.
But Commonwealth Bank outperformed its peers with a one per cent advance to above $180 per share.
ASX-listed miners were a mixed bag, with BHP, Rio Tinto and Fortescue down between 0.6 per cent and one per cent despite steady iron ore futures and an uptick in copper prices.
Gold miners performed well, as the precious metal hovered near $US4,800 ($A6,715) an ounce.
The Australian dollar was buying 71.48 US cents, down from 71.63 US cents on Friday at 5pm.
