The benchmark S&P/ASX200 index had dropped 134.7 points, or 1.53 per cent, to 8,508.0 at midday on Thursday, while the All Ordinaries had fallen 145.2 points, or 1.64 per cent, to 8,702.5.
The losses left the S&P/ASX200 at its lowest level since late November and down 2.5 per cent since the start of the year.
Overnight, Iran attacked Qatar's Ras Laffan Industrial City, where the world's largest LNG plant is located, in retaliation for an Israeli strike on its own South Pars gas field.
The Qatar facility is said to have suffered extensive damage. Brent crude jumped $US4 a barrel to a nine-day high of around $US111.
Meanwhile, the US central bank left interest rates on hold, as expected, but comments made by chairman Jerome Powell diminished hopes for a rate cut later in the year.
The US Federal Reserve has been flagging potential rate cuts this year but Mr Powell told reporters that fewer members of its rate-setting committee favoured that move, given the uncertainties stemming from the war.
Earlier this week , Australia's Reserve Bank hiked interest rates to 4.10 per cent, but seven other central banks meeting this week have either left rates on hold or are expected to do so.
Eight of the ASX's 11 sectors were lower at midday and three were higher.
The biggest loser was materials, which had dropped 4.3 per cent amid heavy losses for gold miners.
Given the prospect of US interest rates staying higher for longer, the yellow metal tumbled to a six-week low of $US4,840, from over $US5,000 an ounce on Wednesday.
Goldminer Northern Star was down 9.3 per cent, Evolution had fallen 8.7 per cent and Regis Resources had dropped 9.7 per cent.
Seventeen of the 20 worst-performing companies in the ASX200 were all goldminers at midday, with Ora Banda down the most, by 12.3 per cent.
Elsewhere in the resources sector, Fortescue dropped 2.4 per cent, BHP fell 3.5 per cent and Rio Tinto lost 3.1 per cent.
Losses were more moderate for the big four banks. Westpac had dropped 0.7 per cent and ANZ, NAB and CBA were all down marginally.
In the energy sector, Woodside was up 5.7 per cent, Santos had gained 3.3 per cent and Whitehaven Coal gained 5.2 per cent.
The Australian dollar was trading at 70.28 US cents, from 71.19 US cents late Wednesday afternoon.
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