Oil prices soared more than four percent Friday and equities reversed early gains following news that the US had killed a top Iranian general, fanning fresh fears of a conflict in the crude-rich region.
The head of Iran's Quds Force, Qasem Soleimani, was hit in an attack on Baghdad's international airport early Friday, according to Hased, a powerful Iraqi paramilitary force linked to Tehran.
Later, Donald Trump tweeted a picture of the American flag, and the Pentagon said he had ordered Soleimani's killing.
Brent surged 4.4 per cent to $69.16 and WTI jumped 4.3 per cent to $63.84 as investors grow increasingly worried about a possible flare-up in the tinderbox Middle East.
"This is more than just bloodying Iran's nose," said AxiTrader's Stephen Innes. "This is an aggressive show of force and an outright provocation that could trigger another Middle East war."
The killing of Soleimani is a dramatic escalation of tensions between the US and Iran and comes after a pro-Iran mob this week laid siege to the US embassy in Iraq following deadly American air strikes on the hardline Hashed faction.
The attack on the embassy highlighted new strains in the US-Iraqi relationship, which officials from both countries have described to AFP as the "coldest" in years.
It also comes as tensions between the US and North Korea worsen, with Kim Jong Un declaring a self-imposed moratorium on nuclear and intercontinental ballistic missile tests had ended, with talks with the US going nowhere.
"We are waking up to a less safe world than it was only hours ago, especially if we combine this with simmering tension in the Korean peninsula," Innes added.
The drama sent investors rushing for the hills and safe-haven units rallied with the yen up 0.7 per cent against the dollar and gold climbing more than one percent.
High-risk currencies retreated against the greenback, with South Korea's won down 0.6 per cent, Australia's dollar down 0.4 per cent and the South African rand down more than one percent.
Equities sank into the red, having been enjoying the second day of the year rallying on trade optimism.
Hong Kong fell 0.2 per cent, while Shanghai shed 0.1 per cent. Singapore retreated 0.2 per cent, Seoul lost 0.1 per cent and Taipei eased 0.3 per cent. However, Sydney, Wellington, and Manila held in positive territory.
Markets had all been well up before news of the strike, thanks to ongoing optimism fuelled by the China-US trade agreement, looser central bank monetary policies and easing Brexit worries.