The S&P/ASX200 fell 32.7 points on Monday, down 0.37 per cent, to 8,697.1, as the broader All Ordinaries lost 30.9 points, or 0.35 per cent, to 8,923.8.
Energy stocks, utilities and traditionally defensive consumer staples sold off on news the United States Navy will support ships to exit the Hormuz Strait, a key transit lane for one-fifth of global oil and natural gas supplies effectively blockaded since the US-Iran conflict began on February 28.
"It will be very interesting, because we just don't know whether this is the start of another initiative or threat which gets walked back or, if it does go ahead, will Iran allow safe passage?" IG market analyst Tony Sycamore told AAP.
"If the Strait of Hormuz was open tomorrow, it just solves so many problems for our economy, but whether that happens or not is unlikely, and it seems it could drag on."
The worst-performing sector was consumer staples, with a2 Milk shares plummeting by nearly one-tenth after a voluntary recall of one of its powder formulas in the US.
Dan Murphy's owner Endeavour also dragged, losing 3.8 per cent to $3.29 after a disappointing trading update.
Energy stocks fell more than two per cent, led by drops in Woodside and Santos after oil prices dipped over the weekend.
Coal producers also sold off, while uranium stocks clawed back some of the previous week's losses.
Basic materials shaved 0.3 per cent, after BHP handed back its early gains and Rio Tinto slipped 0.7 per cent to $170.86, despite iron ore prices surpassing three-month highs.
Gold stocks were mixed but ultimately underwhelming, the gold sub-sector fading less than 0.1 per cent as the precious metal weakened to $US4,587 ($A6,370) an ounce.
Financials were sluggish as NAB tumbled 1.6 per cent after its first-half interim earnings missed expectations, while ANZ bounced modestly from its post-reporting sell-off the previous week.
CommBank shares eased 0.5 per cent to $172.21, while Westpac crept 0.1 per cent higher ahead of its earnings call on Tuesday.
Macquarie, Amcor and Orica will also hand down partial results later in the week.
In company news, fashion group Accent tumbled almost 13 per cent after downgrading its full-year earnings guidance and flagging a probe by the corporate watchdog.
The Australian dollar is buying 71.97 US cents, up slightly from 71.96 US cents on Friday, as markets brace for a widely-tipped Reserve Bank interest rate hike on Tuesday.
But the RBA's decision was not a foregone conclusion, Mr Sycamore said.
"Everyone's talking about the succession of hikes because of the feed-through (of fuel prices to the economy), and that we haven't seen it yet," he told AAP.
"It's a tricky one. I wouldn't want to be putting my money on the outcome tomorrow."
A 0.25 per cent hike on Tuesday would ultimately unwind 2025's three cuts and leave the cash rate at 4.35 per cent, its highest level since December 2024.
ON THE ASX:
* The S&P/ASX200 dipped 32.7 points, or 0.37 per cent, to 8,697.1
* The broader All Ordinaries fell 30.9 points, or 0.35 per cent, to 8,923.8
One Australian dollar trades for:
* 71.97 US cents, from 71.96 US cents at 5pm AEST on Friday
* 112.93 Japanese yen, from 112.29 Japanese yen
* 61.37 euro cents, from 61.33 euro cents
* 53.00 British pence, from 52.88 British pence
* 121.84 NZ cents, from 122.04 NZ cents
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