Markets had been buoyed at the start of this week by US President Donald Trump's announcement that strikes targeting Iran's energy infrastructure would be postponed, adding that the two sides were in peace talks.
But uncertainty over the talks and the virtual closure of the Strait of Hormuz -- through which around 20 per cent of oil and liquefied natural gas normally passes -- has cast a shadow over market sentiment.
"The market rollercoaster continues," said Joshua Mahony, chief market analyst at Scope Markets.
Crude prices rallied more than four per cent on Thursday, with Brent crude near $102 per barrel and WTI above $94.
The dollar rose against its main rivals.
Wall Street's main stock indices were down around one per cent in early afternoon trading. European and Asian markets ended in the red.
"When the oil price surges, the market playbook stays the same: stocks and bonds sell off," said Kathleen Brooks, research director at XTB.
The yield on government bonds rose across the board.
Conflicting messages from the US and Iran are "raising questions about whether there is really an off-ramp to the conflict in the days ahead", said Deutsche Bank's Jim Reid.
Rival plans
Washington was said to have presented a 15-point plan to end the war. Tehran's state-run TV reported officials had put forward their own five conditions for hostilities to end.
Trump on Wednesday threatened to "unleash hell" if Iran did not strike a deal, but Iranian Foreign Minister Abbas Araghchi said his country did not intend to negotiate with the administration in Washington.
On Thursday, Trump said taking control of Iran's oil was an option, as the US had done with Venezuela.
"This is quite the shift in rhetoric from the President, and highlights how complex it will be" to reach a peace deal, said XTB's Brooks.
"The prospect of troops on the ground suggests a prolonged war and not one final blow at Iran," she added.
Pakistan's Foreign Minister Ishaq Dar confirmed Thursday that indirect negotiations between the US and Iran were being held, using Islamabad as an intermediary.
"The tone taken by Iran may simply be posturing, but... there is a high likelihood they continue this conflict until energy prices reach uncomfortable levels," Mahony said.
"Pressure on energy prices, shipping flows and broader financial conditions remains one of the few meaningful sources of leverage (Iran) retains," said Saxo Markets' Charu Chanana.
"There is therefore little incentive to relinquish that leverage prematurely, particularly if market stress strengthens its negotiating position," she added.
The OECD on Thursday cut its eurozone growth outlook and forecast higher inflation for 2026 as energy prices have skyrocketed.
The conflict has also weighed on German consumer sentiment heading into April, a survey showed Thursday, adding to the woes facing Europe's top economy.
France, which holds the G7 Presidency, will on Monday host a meeting bringing together the group's finance ministers, energy ministers, and central bank governors.
Key figures at around 1630 GMT
Brent North Sea Crude: UP 4.8 per cent at $101.91 a barrel
West Texas Intermediate: UP 4.6 per cent at $94.44 a barrel
New York - Dow: DOWN 0.8 per cent at 46,060.00 points
New York - S&P 500: DOWN 1.1 per cent at 6,520.16
New York - Nasdaq: DOWN 1.4 per cent at 21,613.41
London - FTSE 100: DOWN 1.3 per cent at 9,972.17 (close)
Paris - CAC 40: DOWN 1.0 per cent at 7,769.31 (close)
Frankfurt - DAX: DOWN 1.5 per cent at 22,612.97 (close)
Tokyo - Nikkei 225: DOWN 0.3 per cent at 53,603.65 (close)
Hong Kong - Hang Seng Index: DOWN 1.9 per cent at 24,856.43 (close)
Shanghai - Composite: DOWN 1.1 per cent at 3,889.08 (close)
Euro/dollar: DOWN at $1.1534 from $1.1565 on Wednesday
Pound/dollar: DOWN at $1.3340 from $1.3365
Dollar/yen: UP at 159.67 yen from 159.47 yen
Euro/pound: DOWN at 86.49 pence from 86.52 pence
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