Trump on Saturday threatened to "obliterate" Iran's power plants if Tehran did not fully reopen the Strait of Hormuz within 48 hours, a significant escalation barely a day after he talked about "winding down" the war, now in its fourth week.
Iran warned on Sunday it would target US infrastructure, including energy facilities in the Gulf, if Trump carried out his threat, which he made as US Marines and heavy landing craft continued to head to the region.
More than 2000 people have been killed during the war the US and Israel launched on February 28.
The conflict has upended markets, spiked fuel costs, fuelled global inflation fears and convulsed the postwar Western alliance.
"President Trump's threat has now placed a 48-hour ticking time bomb of elevated uncertainty over markets," IG market analyst Tony Sycamore said.
"If the ultimatum is not walked back, we will likely see a Black Monday reopening of global equity markets in free fall and oil prices spiking significantly higher."
Tehran would likely target Gulf energy facilities in Saudi Arabia, the United Arab Emirates and Qatar, which "would deepen and prolong the pain of higher energy prices and drag the conflict into a broader regional crisis", Sycamore said.
Oil prices jumped on Friday and settled at their highest in almost four years after Iraq declared force majeure on all oilfields developed by foreign firms, Israel attacked a major gas field in Iran and Tehran responded with strikes on neighbours Saudi Arabia, Qatar and Kuwait.
Iranian attacks have effectively closed the Strait of Hormuz, a narrow choke point that carries around one-fifth of global oil and liquefied natural gas supplies, causing the worst oil crisis since the 1970s.
Its near-closure sent European gas prices surging as much as 35 per cent last week.
"If Iran doesn't FULLY OPEN, WITHOUT THREAT, the Strait of Hormuz, within 48 HOURS from this exact point in time, the United States of America will hit and oblitreate their various POWER PLANTS, STARTING WITH THE BIGGEST ONE FIRST!" Trump posted on social media around 7:45 p.m. EDT (2345 GMT) on Saturday.
The Strait of Hormuz remains open to all shipping except vessels linked to "Iran's enemies", Iran's representative to the UN maritime agency was quoted as saying in Iranian media reports published on Sunday.
Ali Mousavi's comments came from an interview published on Friday by Chinese news agency Xinhua, before Trump's threat to target Iranian power plants if the strait was not "fully open" within 48 hours.
Mousavi, Tehran's representative to the International Maritime Organisation, said passage through the narrow waterway was possible by co-ordinating security and safety arrangements with Tehran.
Ship-tracking data has shown some vessels, such as Indian-flagged ships and a Pakistani oil tanker, have managed to negotiate safe passage through the strait.
Pakistan has good ties with Iran while maintaining close relations with the US and Saudi Arabia.
Trump's idea in targeting Iranian infrastructure is to make the Hormuz blockade "economically and politically unbearable for Tehran, without destroying Iranian oil fields that would cause long-term global supply damage", Sycamore said.
Iran's Khatam al-Anbiya military command headquarters said if the US attacked Iran's fuel and energy infrastructure, Iran would target all US energy, information technology and desalination infrastructure in the region.
The Islamic republic's power grid is deeply intertwined with its energy sector.
Striking major plants could trigger blackouts, crippling everything from pumps and refineries to export terminals and military command centres.
Tehran fired long-range missiles for the first time on Saturday, expanding the risk of attacks beyond the Middle East, while an Iranian strike landed near Israel's secretive nuclear reactor about 13km southeast of Dimona.
Iran launched two ballistic missiles with a range of 4000km at the US-British military base at Diego Garcia in the Indian Ocean, Israeli military chief Eyal Zamir said.
"These missiles are not intended to strike Israel. Their range reaches European capitals - Berlin, Paris and Rome are all within direct threat range," Zamir said in a statement.
The Israeli military said on Sunday it was striking Tehran just hours after Iran attacked southern Israel.
Trump and his administration have sent mixed messages about US goals throughout the war, leaving allies struggling to respond.
He has accused NATO allies of cowardice over their reluctance to help open the Strait of Hormuz.
Some allies have said they would consider it but most say they are reluctant to join a war Trump started without consulting them.
