Ayatollah Ali Khamenei

Stocks fell Friday and oil extended the previous day's surge on worries that Israel's war with Hamas could widen to a regional conflict with Iran as both sides ratcheted up tensions.

The threat of regional war compounded fears that the Federal Reserve would not cut interest rates as much as previously expected, with focus now on the release of key US jobs data later in the day.

The sell-off followed a plunge across the board on Wall Street that observers said could also be partially blamed on profit-taking from a months-long rally that has seen several indexes hit multiple records this year.

Optimism was at a premium on trading floors after a deadly strike on the Iranian consulate in Damascus, which Tehran blamed on Israel and threatened retaliation.

Supreme leader Ayatollah Ali Khamenei said Tuesday the country "will be punished at the hands of our brave men. We will make them regret this crime and the other ones".

On Wednesday he called the strike a "desperate" effort by Israel that "will not save them from defeat" in Gaza. "Of course they will be slapped for that action."

Israeli Prime Minister Benjamin Netanyahu in return has pledged to go after those who harm his country.

The military strengthened its defences Thursday, while the army paused leave for combat units, blocked GPS signals in certain places and raised its "alertness".

"For years, Iran has been acting against us both directly and via its proxies; therefore, Israel is acting against Iran and its proxies, defensively and offensively," Netanyahu said.

"We will know how to defend ourselves and we will act according to the simple principle of whoever harms us or plans to harm us, we will harm them."

The prospect of a war in the crude-rich Middle East sent prices up more than one percent Thursday, with Brent breaking $90 a barrel for the first time since October.

It extended those gains Friday, along with West Texas Intermediate.

"The wider Mideast tensions stemming from the Gaza war are probably at the highest in months," said Vandana Hari, of Vanda Insights.

"Crude is reflecting that Mideast conflagration fear premium."

Stephen Innes at SPI Asset Management added that the crisis and the war in Ukraine were making investors increasingly nervous.

"The world feels markedly less safe today than when we woke up on Monday. Market sentiment seems to reflect a growing sense of widespread geopolitical unease," he said.

All three main indexes on Wall Street ended more than one percent down, and Asia continued the selling.

Tokyo tanked two percent, with a stronger yen adding to the pain for Japanese investors, while Sydney, Seoul, Singapore, Wellington and Manila were also deep in the red.

Hong Kong was flat and Jakarta edged up. Shanghai and Taipei were closed for a holiday.

London, Frankfurt and Paris fell at the open.

Traders are awaiting the release of US non-farm payrolls data later in the day, which could have a bearing on the Fed's decision-making regarding interest rates.

Confidence in three cuts this year, beginning in June, is being tested by a string of recent data indicating the US economy remains in rude health, while bank officials have done little to soothe concerns.

Minneapolis Fed chief Neel Kashkari said Thursday that there was a chance of no reductions this year, calling inflation figures in January and February "a little bit concerning" and adding that he wanted to see more positive data.

His Philadelphia counterpart Patrick Harker warned prices were still rising too sharply and that "we're not where we need to be", while Richmond boss Thomas Barkin called it "smart" to take time to get a clearer idea about the path for inflation.

However, Cleveland's Loretta Mester indicated officials were close to being confident enough to start lowering rates and Chicago Fed boss Austan Goolsbee said the recent uptick in inflation did not change the view that it was coming down.

Tokyo - Nikkei 225: DOWN 2.0 percent at 39,992.08 (close)

Hong Kong - Hang Seng Index: FLAT at 16,730.84

London - FTSE 100: DOWN 1.0 percent at 7,900.28

Shanghai - Composite: Closed for a holiday

Dollar/yen: UP at 151.24 yen from 151.22 yen on Wednesday

Euro/dollar: DOWN at $1.0832 from $1.0840

Pound/dollar: DOWN at $1.2622 from $1.2641

Euro/pound: UP at 85.82 pence from 85.73 pence

West Texas Intermediate: UP 0.5 percent at $87.02 per barrel

Brent North Sea Crude: UP 0.7 percent at $91.25 per barrel

New York - Dow: DOWN 1.4 percent at 38,596.98 (close)