The Australian sharemarket fell sharply on Tuesday as increasing conflict in the Middle East intensified risk-off sentiment among investors as rising oil prices reignited inflation fears.

The S&P/ASX 200 dropped 1.3%, or 123.60 points, to 9077.30, retreating from Monday’s record close of 9202.90. Ten of the 11 sectors traded lower.

“Investors decided to batten down the hatches and lock in profits after a fantastic February reporting season and a good run higher,” IG market analyst Tony Sycamore said.

Oil remained the central focus, rising 2.6% to $US79.76 a barrel as Iran threatened to close the Strait of Hormuz, a key global oil transit route. The surge in energy prices heightened concerns about renewed inflationary pressures and reduced expectations of near-term interest rate cuts in the United States.

“Surprisingly, the rally in crude oil has been relatively tame,” Sycamore said. “This reflects a market betting on a short conflict and one that was already positioned for such an event.”

Coal miners underpinned gains in the energy sector of the ASX as benchmark Newcastle coal prices jumped 8.6% to $US128.70 per tonne – the most in three years – after Qatar shut down its largest liquefied natural gas plant. New Hope rallied 7.4% to $5.10, Yancoal by 4.9% to $6.49 and Whitehaven Coal 3.2% to $8.19.

Woodside advanced 0.8% to $30.48, adding to strong gains on Monday, while Santos firm 1% to $7.28 and Ampol by 3.2% to $29.98.

Gold miners reversed Monday’s gains despite elevated geopolitical tensions. Newmont fell 2% to $183.44, Northern Star dropped 3.2% to $30.71 and Evolution Mining declined 4.5% to $16.87, while BHP eased 2.6% to $57.70.

Airline stocks remained under pressure, with Qantas down 1.8% to $9.24 – its lowest close since May – amid ongoing Middle East flight disruptions, even as Etihad Airways and Emirates resumed limited services.

DroneShield fell 6.2% to $3.62, erasing Monday’s gains, while Electro Optic, a provider of remote weapon systems, added 2.3% to $9.42 after an 11% jump on Monday.

Magellan Financial Group surged 21.9% to $10.31 after completing a $130 million institutional placement to fund its merger with Barrenjoey, with CLSA upgrading the stock and describing the deal as a “game changer”.

Life360 dropped 17.6% to $20.36 after its guided first-quarter EBITDA margins less than market expectations as a result of an expected decline in device revenue.

Neuren Pharmaceuticals fell 8.8% to $12.56 after partner Acadia Pharmaceuticals said it would seek a re-examination of a European regulator’s decision to refuse approval for trofinetide.

Stockland eased 2.2% to $4.89 after finalising documentation for a 50/50 data centre partnership with EdgeConneX.

Capstone Copper declined 8.1% to $13.30 after reporting record revenue and adjusted EBITDA that fell short of expectations.