HONG KONG (Nikkei Markets) -- Asian shares outside Japan extended losses on Monday as tensions between Washington and Tehran ratcheted up after a US airstrike killed a top Iranian commander.
The Nikkei Asia300 index fell 1.1% to close at 1,378.03, adding to Friday's 0.3% decline.
On Sunday, Tehran said it will not comply with the uranium enrichment limits agreed under a 2015 nuclear deal after the U.S. strike in Baghdad killed Iran's top military commander. Iranian Supreme Leader Ayatollah Ali Khamenei earlier had threatened "severe retaliation" for the killing. Meanwhile, Iraqi lawmakers passed a measure calling for the removal of U.S. military forces from their country.
U.S. President Donald Trump reportedly threatened Iraq with sanctions following the measure and warned Iran of disproportionate retaliation if the country strikes back on any U.S. person or target.
"A severe escalation of tensions in the Middle East - or even outright hostilities - has the potential to easily subsume any benefits from the interim U.S.-China trade agreement," Jeffrey Halley, a senior market analyst at OANDA, said. "With so much cash heavily invested in global recovery trade in the elusive search for yield, a downward correction in asset prices could be aggressive."
An interim trade deal between the U.S. and China, reached last month and expected to be signed next week, had lifted equities worldwide last month.
Not helping risk appetite in Asia was weak U.S. manufacturing data. According to data released on Friday, the ISM gauge of U.S. manufacturing declined to a weaker-than-expected 47.2 last month, down from 48.1 in November. It was the lowest reading on the gauge in more than 10 years, according to Reuters.
Energy-related shares were the top performers on the A300 on Monday, boosted by Brent crude climbing above $70 a barrel for the first time in almost four months. PetroChina added 4%, China Petroleum & Chemical (Sinopec) climbed 0.6%, and CNOOC jumped 3.6%. Thailand's PTT Exploration and Production ended 2.7% higher.
Mainland property developer China Vanke fell 1.4% after reporting a 9% decrease in December contracted sales.