Asian shares and US treasury yields tumbled on Wednesday, while the yen, gold and oil shot higher after Iran fired rockets at Iraqi airbases hosting US military forces, stoking fears of a wider conflict in the Middle East.

Iran's missile attacks on the Ain Al-Asad air base and another in Erbil, Iraq, early Wednesday came hours after the funeral of an Iranian commander whose killing in a US drone strike has intensified tensions in the region.

MSCI's broadest index of Asia-Pacific shares outside Japan was 1per cent lower shortly after China's share markets began trading, with China's blue-chip CSI300 index down 0.56 per cent.

Japan's Nikkei tumbled 2.2 per cent and Australian shares fell more than 1 per cent. US stock futures were also sharply lower, with S&P500 e-minis off nearly 1 per cent.

“It's a very classic risk off,” said Rob Carnell, Asia-Pacific chief economist at ING in Singapore.

“This is the Iranian response to the killing of Soleimani. We now have to see what the US response to the Iranian response is. This looks as if it could escalate,” he said.

“If you see US treasuries rallying a bit this morning, expect them to rally quite a bit further should there be a forceful response from the United States, which I'd imagine there would be...from a market perspective I think this one could run and run.”

The yield on benchmark 10-year US Treasury notes last stood at 1.7534 per cent, down more than 7 basis points from a US close of 1.825 per cent on Tuesday, though up from session lows. US 10-year Treasury futures had earlier peaked at their highest level since November, and were last up 0.63 per cent.

The two-year yield dropped to 1.4982 per cent compared with a US close of 1.546 per cent.

Dollar and other currencies react

The dollar slipped against the yen, with the Japanese currency touching its strongest point against the greenback since October. The US currency was last down 0.28 per cent against the yen at 108.11.

The euro was relatively unmoved on the day, rising 0.04 per cent to buy $1.1155. The dollar index, which measures the greenback against six major peers, was 0.19 per cent lower at 96.819.

In commodity markets, global benchmark Brent crude futures shot back above $70 per dollar to their highest level since mid-September, and were last up 3.59 per cent at $70.72 per barrel. US crude soared 3.46 per cent to $64.87 a barrel.

The flight to safety and a falling dollar supported gold, which rocketed 1.80 per cent on the spot market to $1,602.39 per ounce.

“You can pretty much get the sentiment from gold. It is holding above $1,600, if there is confirmation that there are US casualties, it could go higher,” said Matt Simpson, a senior market analyst at Gain Capital in Singapore.

“If it does look like we've got US casualties, then I don't think Trump is going to just stand back and take that,” he said. “World War III has been thrown around. I don't think we're there yet. But it does look like Iraq II.”

Reports of the attack threw the market off balance after better-than-expected data in the US non-manufacturing sector helped to lift the dollar overnight. Markets in Asia had bounced on Tuesday amid easing anxiety over the possibility for further escalation in the Middle East.

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