Kuwaiti and Saudi stocks led Gulf stocks sharply lower in late afternoon trade on Sunday, reports Reuters, in the wake of a US drone strike in Baghdad that killed Iran's military commander.
Shares of oil giant Saudi Aramco fell 1.7% to their lowest level since listing last month in a record initial public offering (IPO).
Aramco shares dropped to 34.55 riyals a share, the lowest level since it started trading last month.
Iranian military commander Qassem Soleimani, the architect of Tehran's overseas military operations was killed on Friday in a US drone strike on his convoy at Baghdad airport.
The Kuwaiti index, the best performer in the region in 2019, was down nearly 4.1%, while Saudi stocks plunged 2.2%.
Dubai stocks were down 3.1% with property firm Emaar Properties falling 3.7%. The Abu Dhabi index fell 1.41%.
Banks also took a beating, with Al Rajhi Bank down 2% and Samba Financial Group down nearly 3%.
"A U.S.-Iran war could shave 0.5 percentage points or more off global GDP, mainly due to a collapse in Iran's economy, but also due to the impact from a surge in oil prices," Jason Tuvey, senior emerging markets economist at Capital Economics, said in a note last week.
Saudi credit default swaps, which investors buy as protection against default, rose by more than 13% on Friday following Soleimani's killing, Refinitiv data showed.
Regional bond spreads are expected to widen on Monday, when international debt markets open, because of increased political risk, a debt banker said.
Oil prices jumped to $63.05 a barrel on Friday, their highest level in more than three months, after Soleimani's killing sparked fears that conflict in the region could disrupt global oil supplies.