Oil prices soar after Israel launches strikes on Iran's capital
The price of Brent crude jumped nearly 10% higher at one stage before easing back a little to stand 7% higher at 74 US dollars a barrel.
London's FTSE 100 Index dropped 0.6%, down 56 points to 8828.6, in early morning trading on Friday after heavy overnight losses on Asian stock markets as the worries spooked investors, with the UK's top tier falling back from a record high set in the previous session.
The strikes by Israel on Iran's capital Tehran early on Friday are said to be the most significant attack the country has faced since its 1980s war with Iraq and have led to concerns over an all-out conflict between the two Middle Eastern countries.
In Washington, the Trump administration said it had not been involved in the attack and warned Iran not to retaliate against US interests or personnel.
It threatens disruption to the supply of crude from the Middle East while some traders flagged concerns it could also impact the flow of liquified natural gas (LNG) if tensions escalate.
Rising oil prices could threaten to push up inflation in the UK, possibly impacting the outlook for further interest rate cuts.
The Bank of England has been cutting rates but, as inflation strays further from the 2% target, it has less leeway to bring down borrowing costs.
Derren Nathan, head of equity research at Hargreaves Lansdown, said: 'It's not just the outlook for Iranian exports that's a concern but also the potential for disruption to shipping in the Persian Gulf's Strait of Hormuz, a key route for about 20% of global oil flows and an even higher proportion of liquified natural gas haulage.'
He added: 'The escalation of military action adds another factor to consider for central bankers in an already complex world as they weigh up the inflationary impact of ever-changing tariff rates and a weakening outlook for jobs and growth.'
On the London market, oil giants BP and Shell were among the biggest risers on the steep gains in the cost of crude, with shares up 2% for both firms.
Aerospace giant BAE Systems was also moving higher as the threat of a full-scale war in the Middle East put defence stocks back in the spotlight, with the stock up 3%.
But London-listed airlines were down sharply, hit by a double whammy as rising oil prices spell higher fuel costs for the sector and following the devastating air crash in India.
British Airways owner International Consolidated Airlines fell more than 4% and easyJet was just under 4% lower in morning trading.
Gold prices also leaped towards another fresh record as investors raced for safe haven assets, which could see it breach the 3,431 US dollars-an-ounce high set earlier this month.
Kathleen Brooks, research director at XTB, said: 'If the oil price continues to climb towards 100 US dollars in the coming days, then we could see the interest rate futures market price out rate cuts from the US and Europe, which may add to downside pressure on stocks.
'However, if there is no nuclear escalation, then we think we could see oil prices settle back around 70 US dollars per barrel.'
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