San Francisco Frontiers - Asian stocks drop amid fears over US-Iran ceasefire

And while oil prices fell, they held most of the huge gains seen Monday after the two countries traded fire over the key waterway and the United Arab Emirates reported a strike on an installation.

The exchanges came after Donald Trump announced a mission called "Project Freedom" to guide ships from neutral countries out of the Gulf, saying it was a humanitarian effort to help stranded crews.

The US president was later quoted by Fox News as warning that Iran would be "blown off the face of the Earth" if it attacked US ships.

Crude prices surged Monday -- with Brent up almost six percent -- after a US admiral said US forces sank six small Iranian boats. Iran denied any had been sunk and earlier fired warning shots at US warships.

That came after the UAE said an energy installation in the emirate of Fujairah had been hit, while the UAE defence ministry announced four cruise missiles were launched from Iran, with three successfully shot down and another falling into the sea.

A senior Iranian military official did not deny the strikes but said: "What happened was the product of the US military's adventurism to create a passage for ships to illegally pass through" the Strait of Hormuz, according to state television.

Still, Iranian Foreign Minister Abbas Araghchi said the clashes showed there was "no military solution to a political crisis" and pointed to Pakistan's efforts to keep mediating.

Both main oil contracts slipped Tuesday, with West Texas Intermediate shedding more than two percent. However, it was hovering just below $104, and Brent shed more than one percent to sit around $113.

"The US has already demonstrated its willingness to secure passage, successfully guiding vessels through contested waters," said Stephen Innes at SPI Asset Management.

"But the response from Tehran has been equally clear, signalling that any proximity to its strategic perimeter will be met with force, raising the stakes into something that feels less like brinkmanship and more like an asymmetric pressure campaign."

Fears that the ceasefire, which has been in place since early April, could fall apart weighed on Asian equities, with Hong Kong, Singapore, Mumbai, Bangkok, Manila and Wellington all down.

Sydney also retreated as the Australian central bank hiked interest rates for the third straight meeting, citing rising energy prices.

London also fell but Paris and Frankfurt rose.

Tokyo, Seoul and Shanghai were closed for holidays.

The losses followed a drop on Wall Street -- where the S&P 500 and Nasdaq came off record highs -- and came after a healthy rally fuelled by fresh interest in all things linked to artificial intelligence.

"Whether Operation Project Freedom actually proceeds, or proves to be the latest in a long line of initiatives and threats that fail to gain traction or are later walked back, remains to be seen," said IG's Tony Sycamore.

"If it does proceed, whether Iran will allow safe passage or instead chooses to fire on escorted vessels is another open question."

Meanwhile, Wells Fargo Investment Institute's Darrell Cronk warned that even if the crisis is brought under control, energy markets and factory activity would likely take some time to get back to normal.

- Key figures at around 0810 GMT -

West Texas Intermediate: DOWN 2.6 percent at $103.68 a barrel

Brent North Sea Crude: DOWN 1.4 percent to $112.84 a barrel

Hong Kong - Hang Seng Index: DOWN 0.8 percent at 25,898.61 (close)

London - FTSE 100: DOWN 0.8 percent at 10,278.38

Tokyo - Nikkei 225: Closed for a holiday

Shanghai - Composite: Closed for a holiday

Dollar/yen: UP at 157.22 yen from 157.08 yen on Monday

Euro/dollar: DOWN at $1.1691 from $1.1701

Pound/dollar: UP at $1.3540 from $1.3538

Euro/pound: DOWN at 86.34 pence from 86.41 pence

New York - Dow: DOWN 1.1 percent at 48,941.90 (close)

T.Rivera--SFF