Brent crude oil, the international benchmark, tumbled below $90 a barrel at one stage early on Tuesday after climbing above $118 - a six-year high - in the previous session.
The key worry is the effective closure of the narrow Strait of Hormuz shipping lane just off the Iranian coast.
Iran latest: Trump's key messages on war's objectives
It's currently off limits due to the threat of attack by Tehran's forces in retaliation for the US-Israeli airstrikes that targeted its leadership and key infrastructure.
President Trump gave mixed messages on the status of the war on Monday evening, after describing US objectives as "complete" and declaring that it "could be over soon".
He added: "I will not allow a terrorist regime to hold the world hostage and attempt to stop the globe's oil supply, and if Iran does anything to do that, they'll get hit at a much, much harder level."
The strait usually accounts for about a fifth of global oil and natural gas deliveries, but they have almost ground to a halt over the past 10 days.
It has stoked market fears that a new wave of energy-led inflation is on the way - a surge in the pace of price increases globally brought on by higher oil and gas costs that will affect everything from filling up at the petrol pumps and home heating, to the manufacturing industry and even fresh food production.
For the UK and wider Europe, it is already being seen through a leap in fuel prices, especially diesel.
Average pump costs have risen by more than 9p a litre since the start of the hostilities in the Middle East but some forecourts have passed on prices that are double that figure.
The government and competition regulator warned the industry that any profiteering will be called out.
The G7 advanced economies, including Britain, plan to release reserves if needed to ease the squeeze from the loss of Middle East output and deliveries.
Brent was trading on Tuesday at $90 a barrel in volatile trading in Asia.
The FTSE 100 opened 0.5% higher at 10,300, recovering all the ground lost yesterday following the 1.8% decline seen at Monday's open.
The energy price declines were hurting the oil majors while mining and banking stocks were recovering some lost ground.
The UK's top flight index remains almost 5% up on the year despite a 4.6% hit to values this month caused by war uncertainty.
Miners have suffered due to the likelihood of negative effects for the global economy while banks have felt pain over fears central bank interest rates may have to rise to help counter upwards pressure on the pace of price rises from the lift in energy costs.
UK natural gas prices are down 20% today but remain 60% higher this month.
Stock markets in other parts of Europe and in the US had ended Monday's session in positive territory after also starting the day with steep losses.
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Sentiment remained stronger in both Asia and in continental Europe on Tuesday, but market analysts widely described the mood as cautious.
Nigel Green, chief executive of the asset manager and consultancy deVere Group, said of the shifts: "Markets are beginning to trade the end of the conflict before it has actually happened.
"Oil dropping back below $90 and equities pushing higher tells us investors are already pricing a scenario in which tensions cool and supply disruptions remain limited.
"Financial markets are extremely forward-looking but, in situations like this, they can move ahead of geopolitical reality."
Donald Trump's claim that the war could be over "soon" will grab headlines.
But traders don't trade on soundbites. They trade on risk.
That explains the sudden urgency from the commander-in-chief.
Ten days ago, he warned that the war could last four to six weeks.
Now, he's boasting that it could be over "very soon."
"Not this week," he told an audience in Florida, but objectives are "pretty well complete".
He listed battlefield successes - boasting 5,000 targets had been hit.
The president said he would "live with" the outcome of a report on a strike on a school.
But he tried to pin the blame for the attack, which claimed dozens of lives, elsewhere.
Trump said many countries, including Iran, use Tomahawks, a "generic" weapon.
The UK, Australia, the Netherlands, and Japan are the only other countries with Tomahawks.
Unless he's suggesting one of them carried out the strike, he has effectively implicated the US.
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Nevertheless, he appears poised to declare victory and find an off-ramp.
But his newfound optimism lands in a space where politics and markets collide.
US crude surging to $119 per barrel, then dropping a record 4% on talk of an ending.
It's a problem for Trump that Iran had already acknowledged by mocking the military codename: "Operation Epic Fury."
"Operation Epic Mistake," the country's foreign minister posted, alongside a graphic of oil prices.
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Iran's Islamic Revolutionary Guard says it will "determine the end of the war".
In a statement, it said Tehran would not allow the export of "one litre of oil" from the region if US and Israel attacks continue.
Trump posted on Truth Social: "If Iran does anything that stops the flow of oil within the Strait of Hormuz, they will be hit by the United States of America TWENTY TIMES HARDER than they have been hit thus far."
For a trader sitting in London, Houston or Singapore, the question is not what Trump says but what happens on the ground.
In times of conflict, the price of a barrel speaks louder, and more truthfully, than a presidential promise of peace.
Ministers say it is a working definition and a "tool for government and organisations to better understand, measure, prevent and address anti-Muslim hostility".
Crucially, the definition is non-statutory - meaning it is advisory and has no legal backing.
Discrimination of someone due to their religion or belief is already unlawful under the Equality Act.
Communities Secretary Steve Reed told MPs that ministers had a duty to act against record levels of hate crime against Muslims, but that "you can't tackle a problem if you can't describe it".
He also denied the definition would interfere with freedom of speech or create "blasphemy laws by the back door".
Hate crimes against Muslims reported to police in England and Wales rose by almost a fifth in the year ending March 2025, to 3,199 offences.
The figure does not include incidents reported to Metropolitan Police due to changes in its recording system.
Jewish people faced the highest rate of hate crimes, according to the government figures, with 106 incidents per 10,000 population. Muslims were second, with 12 per 10,000 population.
In February last year, the government set up a working group, led by former Tory minister Dominic Grieve, to come up with a definition of anti-Muslim hatred or Islamophobia.
But Sky News learnt in October that ministers were moving away from the word "Islamophobia" and towards "anti-Muslim hostility".
Alongside the new definition, ministers have set out an accompanying text which says freedom of speech and expression are protected by law, which includes criticising or ridiculing a belief, including Islam.
"Portraying it in a manner that some of its adherents might find disrespectful or scandalous," is also legal, the text says.
Speaking in the Commons, shadow communities minister Paul Holmes said the definition risked "hindering legitimate criticism" - which Mr Reed rejected.
"We will not do what [the Conservatives] did and stand by and simply watch while Muslim communities face targeted abuse in ways that any decent country would consider to be absolutely intolerable," he replied.
Mr Reed announced the new definition as he unveiled a wider strategy on social cohesion.
The British Muslim Trust welcomed the move, with chairman Shabir Randeree saying it would "help guide institutions that have too often been too slow or too weak in their responses to incidents a tolerant and respectful country like ours must never accept".
The government is to also appoint a special representative on anti-Muslim hostility to engage with communities and help facilitate understanding and implementation of the definition.
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Prime Minister Sir Keir Starmer visited a community centre in London on Monday to speak with residents about how the government was trying to protect people from the impacts of the war in the Middle East.
He said "we mustn't let" the conflict drive apart communities in the UK, and that Muslim and Jewish communities in particular needed reassuring.
Mr Reed also told MPs in the Commons that the government was protecting Jewish communities with "record funding for security at synagogues and schools, millions of pounds to tackle antisemitism in schools and universities, new laws to stop abusive protests outside places of worship".
He added: "Today, we are going even further to tackle antisemitism in schools and colleges and in the healthcare system, and crucially, clamping down hard on the extremism which so often targets Jews first of all."
The Met Office says while there may be sunny spells in the south and east of the country, many should brace for wintry conditions returning on Thursday.
Clouds, winds and outbreaks of rain are forecast, with downpours being the heaviest on western hills.
Blustery showers are expected to hit the northwest and there is a chance of snow on Scottish mountains.
Up to 50mm of rain could fall over the Lake District, with heavy rainfall possible further south.
On Friday, temperatures are expected to drop across the country.
Jason Kelly, chief operational meteorologist for the Met Office, said: "A notable shift in wind direction to a north-westerly flow will bring a markedly colder day nationwide on Friday, with the potential for a mixture of sunny spells, heavy showers, coastal gales, and snow over high ground.
"There's also the possibility of accumulations on lower hills too. The picture will become clearer closer to the time, so keep an eye on our forecast as the week progresses."
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Joanna Robinson, Sky News's weather producer, said: "The next few days will generally see temperatures around average or slightly above, with highs reaching the mid-teens on Thursday.
"Rain moving through on Thursday will introduce colder air from the north, with temperatures widely below average on Friday and Saturday before recovering slightly.
"Friday will bring showers, with snow down to relatively low levels in the north, especially early on.
"There'll be fewer showers around on Saturday, and the snow risk will become increasingly confined to the highest hills.
"Frosty conditions overnight will bring the risk of icy stretches."
The Conservatives had pushed for the move via an amendment to the government's flagship education legislation currently going through parliament: the Children's Wellbeing and Schools Bill.
It had been backed by the House of Lords, but was defeated in the Commons on Monday night by 307 votes to 173.
Calls for a ban have gained traction after Australia became the first country in the world to enforce one back in December. Since then, other nations - including in Europe - have been flirting with the idea.
Sir Keir Starmer has been accused of "dither and delay" by announcing the UK government will consult on a possible ban, without committing to one.
In a statement after the Commons vote, the Liberal Democrats said his stance was "not good enough" and "families need concrete assurances now".
During the debate, shadow education secretary Laura Trott described the situation as an "emergency", as she cited polling which suggested 40% of children are shown explicit content on smartphones during the school day.
"No more guidance, no more consultations. Legislate, do something about it," she said.
Government leaves door open to action
Some 107 Labour MPs abstained on the amendment to the education bill, including Sadik Al-Hassan, who told the Commons parents were "locked in a daily battle that they simply cannot win alone, fighting platforms that have been specifically designed to keep children hooked".
But education minister Olivia Bailey cited concerns from children's charities that an outright ban on under-16s using social media could drive them towards "less regulated corners of the internet", or leave them "unprepared" for how to navigate the online world.
She said the government's consultation would "seek views to help shape our next steps" - which could ultimately still include banning children from platforms like Instagram and TikTok.
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One measure MPs did back on Monday was to grant additional powers to the technology secretary, Liz Kendall, to potentially introduce such a ban in future.
She could also limit children's use of VPNs and restrict access to addictive features of apps like autoplay videos.
'Huge demand' for ban
The Children's Wellbeing and Schools Bill will now return to the House of Lords to be further considered by peers.
Lord Nash, the Conservative who proposed the amendment, has vowed to try to have it passed again. He said there's "huge demand across the country to raise the age limit and protect children".
The bill will only become law if both Houses agree the final draft.