Global oil prices surged and financial markets faltered as intense strikes across the Middle East and attacks on ships drove fears of energy supply disruption.
London’s FTSE 100 opened lower as trading was knocked by the growing conflict between Iran and US-Israeli forces.
The blue chip share index fell more than 1% at one stage just after opening, but soon pared back to stand 0.6% lower, down 69.1 points at 10841.4
Israel launched strikes on Lebanon’s capital Beirut on Monday after missiles were fired by militant group Hezbollah.
The latest strikes came after the US and Israel hit targets across Iran on Sunday as part of an intensifying military campaign which followed the killing of Supreme Leader Ayatollah Ali Khamenei.
Oil supplies could be affected by the conflict after Iran reportedly warned tankers on the strait of Hormuz that no ships would be allowed to pass through.
UK Maritime Trade Operations Centre officials said that two vessels have been struck near to the key trade artery.
The Strait of Hormuz is used by tankers carrying around one fifth of the world’s oil supplies and seaborne gas.
On Monday, the price of Brent crude oil soared by as much as 13%, rising above 82 dollars a barrel, before paring back.
It was 8.8% higher at 79.3 dollars a barrel after 9am.
Nevertheless, City analysts have said the markets have been relatively contained so far in reaction to the conflict.
Chris Beauchamp, chief market analyst at IG, said: “While we have seen a significant surge in oil prices since markets opened last night, the gains appear contained for now as we wait to see if shipping through Hormuz can continue at lower levels or will be blocked entirely.
“Oil and gas infrastructure in the region has not yet been extensively targeted, keeping oil well south of the 100 dollar barrel range that many expected as a result of the weekend.”
Meanwhile, the pound dipped in value against the US dollar to its weakest level since December.
The fall is partly linked to the strength of the dollar, with investors pouring funds into the US “safe haven” currency.
The pound was down 0.92% at 1.335 versus the dollar on Monday morning.
London stocks were broadly weaker, with travel stocks among those dropping particularly sharply.
Cruise giant Carnival slid by 8%, while airline firm IAG, the parent firm of British Airways, dipped by 7.6%.
Rival Wizz Air, which typically runs flights to Dubai and Abu Dhabi, was also down 7.3% in early trading on Monday, while travel-focused retail groups SSP and WH Smith were also firmly lower.
However, defence stocks were among the gainers, with BAE Systems lifting by 7.4% to 2,268p.
Elsewhere, oil and energy stocks were also stronger – Shell and BP rose by 4.5% and 3.5% respectively as prices lift.
International stock markets also opened weaker after the start of trading, with the Nikkei 225 in Tokyo falling by 1.5% after Asian markets opened.