The benchmark Sensex fell by 530 points during the early trade on Monday as the Brent climbed over 2 per cent to $70 a barrel, owing to the escalating tensions between Iran and the United States.
Prices of safe-haven assets also skyrocketed over fears of further military escalation. Gold prices hit Rs 41,330 per 10 gram on Friday, hitting its highest level.
At 10 am, the Sensex was trading at 41,022.30 lower by 442.31 points or 1.07 per cent. It opened lower at 41,378.34 from its previous close of 41,464.61.
The Nifty also fell over 1 per cent to trade at 12,082.95 lower by 143.70 points or 1.18 per cent.
Observers expressed concern over the deepening crisis that has heightened fears of a major Middle East conflagration. Iran has said it was taking another step back from commitments under a 2015 nuclear deal with six major powers.
Besides, Iraq's parliament called on Sunday for the US and other foreign troops to leave as a backlash grows against the US killing of high profile Iranian general Qassem Soleimani, and President Donald Trump doubled down on threats to target Iranian cultural sites if Tehran retaliates.
In a series of aggressive tweets, US President Donald Trump said: "They (Iran) attacked us, & we hit back. If they attack again, which I would strongly advise them not to do, we will hit them harder than they have ever been hit before!
".. If Iran attacks an American Base, or any American, we will be sending some of that brand new beautiful equipment their way...and without hesitation," Trump said.
The rupee hit its lowest level since November 14 and was last weaker by 0.36 per cent to 72.06 against the dollar as oil prices surged more than 2 per cent.
Markets worldwide came under pressure from a major escalation in tensions in the Middle, said Ashish Nanda, executive vice president at Kotak Securities in Mumbai. "Equity markets never like uncertainties and it would result in weakness in the short term."
(With agency inputs.)