The benchmark S&P/ASX200 tumbled 131.1 points by noon on Monday, down 1.56 per cent, to 8,297.3, as the broader All Ordinaries slumped 147.7 points, or 1.70 per cent, to 8,484.7.
The All Ordinaries, which comprises Australia's 500 most valuable listed companies, has dropped 10 per cent from recent all-time highs, wiping $322 billion from the index since the war began on February 28.
US President Donald Trump has now issued an ultimatum to Iran to re-open the Strait of Hormuz - a choke point for a fifth of global oil supplies - within 48 hours, or face US attacks on its power plants.
If Mr Trump follows through, Iran has vowed to attack energy infrastructure and crucial desalination plants in gulf states housing US bases.
"President Trump's threat has now placed a 48-hour ticking time bomb of elevated uncertainty over markets," IG market analyst Tony Sycamore said.
The escalating conflict has caused global oil prices to surge, fanning inflation concerns and weighing on the prospects of global growth, pummelling equities markets.
Australian miners have been hit hard, the sector tumbling four per cent by midday, taking its losses to more than 23 per cent since the war began.
Mega miners BHP and Rio Tinto each dipped more than two per cent, while mixed miner South32 tumbled 4.9 per cent to $3.79.
Gold producers were under selling pressure, with Evolution, Northern Star and Newmont all falling seven per cent or more, as the precious metal slipped to $US4,358 ($A6,227) an ounce.
Gold stocks made up the majority of the top-200's 15 worst-performers.
Local energy stocks traded roughly flat, as Woodside and Santos edged roughly 0.5 per cent higher, but coal miners and uranium stocks fell behind.
The owners of Australia's two remaining crude oil refineries, Ampol and Viva, gained 0.9 per cent and 1.3 per cent, respectively.
Industrials stocks traded 1.4 per cent lower, with Qantas down 1.3 per cent to $8.23 and Virgin Australia taking a 7.3 per cent hit, amid ongoing disruptions to global travel and after both airlines announced they would hike airfares to account for surging jet fuel costs.
The heavyweight financials sector faded as all big four banks traded lower, led by a two per cent slump in NAB shares to $44.66, while CBA lost 0.8 per cent to $174.26.
Major insurers bucked the broader trend, with QBE, Suncorp and IAG carving out gains.
In company news, ARN Media shares dived 4.6 per cent to 31.5 cents as shock jock Kyle Sandilands launched legal action against the group after it took The Kyle and Jackie O Show off air and terminated his $100 million contract.
Stokes family-controlled SGH has elevated its Boral subsidiary chief operating officer Matt McKenzie to the top job, to replace current CEO Vik Bansal on April 1.
The Australian dollar was buying 69.95 US cents, down from 70.86 on Friday at 5pm.
