The S&P/ASX200 fell 124.8 points on Thursday, down 1.43 per cent to 8,592.9, as the broader All Ordinaries dropped 125.6 points, or 1.4 per cent, to 8,819.6.
Gold fell to a two-month low and oil surged more than three per cent after Iran's Revolutionary Guard claimed to have targeted a US military base and Kuwait reported intercepting hostile missiles and drones.
The local move wiped all of the recent week's gains in a single session and left some traders wondering about market optimism for an imminent US-Iran peace deal.
"Are the markets going to learn from today's episode?" IG market analyst Tony Sycamore said.
"We still don't have a peace deal in place and here we are, six (prospective) peace deals in, and we're still getting caught out by these types of moves."
Stock indices across Asia also sold off, with the Nikkei and South Korea's KOSPI down 1.1 per cent and 0.5 per cent by 5pm AEST, while Wall Street futures pointed to a modest impact on US stocks.
"When you look at the ASX200, we haven't gone up, we've underperformed, and now we're basically outperforming to a degree on the downside," Mr Sycamore said.
The local exchange's two biggest sectors took some of Thursday's heftiest losses, with basic materials down 2.4 per cent and financials slumping 1.6 per cent by the close.
Gold miners were a sea of red, with the All Ordinaries gold sub-index down more than seven per cent and the precious metal trading at $US4,380 ($A6,149) an ounce, its weakest price since March.
Mega miners BHP, Rio Tinto and Fortescue also stumbled, as copper and iron ore futures dipped.
CommBank shares led the big four banks (and the broader financial sector) into the red, down more than two per cent to $161.41.
Energy stocks tipped lower despite oil prices firming, with refinery operators Ampol and Viva Energy rising 0.4 per cent each as fossil fuel producers and uranium stocks sold off.
Consumer-facing stocks advanced on the back of improved discretionary spending figures, with staples and cyclicals gaining roughly 0.2 per cent.
Health care, IT stocks and real estate trusts were under pressure, falling between 0.9 per cent and 1.6 per cent.
In company news, Eagers Automotive tumbled by almost 10 per cent to $20.55 after Macquarie cut its price target for the automotive seller to $27.10 following Wednesday's wary market update.
Star Entertainment slipped almost five per cent as a Federal Court judge weighed slapping a $1.3 million fine on former chief executive Matthias Bekier for failing to disclose criminal risks of overseas junkets to its board.
The Australian dollar is buying 71.22 US cents, down from 71.46 US cents on Wednesday at 5pm.
ON THE ASX:
* The S&P/ASX200 fell 124.8 points, or 1.43 per cent, to 8,592.9
* The broader All Ordinaries lost 125.6 points, or 1.4 per cent, to 8,819.6
One Australian dollar trades for:
* 71.22 US cents, from 71.46 US cents at 5pm AEST on Wednesday
* 113.59 Japanese yen, from 113.89 Japanese yen
* 61.34 euro cents, from 61.37 euro cents
* 53.13 British pence, from 53.13 British pence
* 120.95 NZ cents, from 121.65 NZ cents
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