Oil prices rise, stocks slide as Iran-Israel tension escalates

Oil prices briefly surged and stock markets slid Friday on reports Israel had carried out retaliatory strikes against Iran, boosting investments deemed safer such as gold.

Iran's state media reported explosions in the central province of Isfahan on Friday, as US media quoted officials saying Israel had carried out retaliatory strikes against its arch-rival.

"Asian markets bore the brunt of the breaking news of a retaliatory attack on Iran by Israel, also sending Dow futures sharply lower and resulting in further spikes in gold and oil prices," noted Richard Hunter, head of markets at Interactive Investor.

"US markets will not have the opportunity to react directly to the developments until later, but the escalation will put pressure on the main indices, which were already lining up for a weekly drop."

Crude oil prices dropped, having briefly surged as much as four percent on worries about supplies from the oil-rich region.

The rush for safety also saw the yen rally against the dollar and gold jump back past $2,400 per ounce, while the Swiss franc and US government bonds won support.

Israel had warned it would hit back after Iran fired hundreds of missiles and drones at Israel almost a week ago, in retaliation for a deadly strike -- which Tehran blamed on its foe -- that levelled Iran's consular annex at its embassy in Syria.

Fears of a major regional spillover from the war in Gaza between Israel and Iran-backed Palestinian militants have since soared. Appeals by world leaders for de-escalation again echoed on Friday.

There had been no reaction from Israeli or Iranian officials, and the extent of the damage remained unclear.

The mood among traders was already downbeat as they contemplated the prospect of the Federal Reserve staying pat on US interest rates this year following data showing jobless claims came in below expectations while a gauge of business activity hit a two-year high.

Atlanta Fed boss Raphael Bostic said inflation is "too high" and he felt there was no need to cut borrowing costs until later in the year.

New York Fed chief John Williams and governor Michelle Bowman also said they saw fewer reductions than expected, if at all, this year.