Later, Donald Trump tweeted a picture of the American flag, and the Pentagon said he had ordered Soleimani's killing.

Iran's supreme leader Ayatollah Ali Khamenei warned of "severe revenge" for "the criminals who bloodied their foul hands with his blood", while the country's foreign minister called the move a "dangerous escalation".

Brent surged 4.4 percent to $69.16 and WTI jumped 4.3 percent to $63.84 as investors grow increasingly worried about the effects of a possible flare-up in the tinderbox Middle East on supplies of the commodity. Both contracts later pared the gains but remained well up.

"This is more than just bloodying Iran's nose," said AxiTrader's Stephen Innes. "This is an aggressive show of force and an outright provocation that could trigger another Middle East war."

The killing of Soleimani is a dramatic escalation of tensions between the United States and Iran and comes after a pro-Iran mob this week laid siege to the US embassy in Iraq following deadly American air strikes on the hardline Hashed faction.

The attack on the embassy highlighted new strains in the US-Iraqi relationship, which officials from both countries have described as the "coldest" in years.

Oil prices saw a record surge in September after attacks on two Saudi Arabian facilities briefly slashed output in the world's top exporter by half, with Trump blaming Iran for the attack and previous other blasts on tankers in the Gulf last year.

The crisis also comes as tensions between the US and North Korea worsen, with Kim Jong Un declaring a self-imposed moratorium on nuclear and intercontinental ballistic missile tests had ended, with US talks going nowhere.

"We are waking up to a less safe world than it was only hours ago, especially if we combine this with simmering tension in the Korean peninsula," Innes added.

The drama sent investors rushing for the hills and safe-haven units rallied with the yen up 0.7 percent against the dollar and gold climbing 1.4 percent towards $1,600 and a near seven-year high.

High-risk currencies retreated against the greenback, with South Korea's won down 0.6 percent, Australia's dollar off 0.4 percent and the South African rand down more than one percent.

Equities were mixed, having been rallying for the second day of the year on China-US trade optimism.

Hong Kong fell 0.3 percent, Shanghai ended down 0.1 percent and Singapore retreated 0.7 percent, while Mumbai eased 0.5 percent.

But there were gains in Sydney, Seoul, Wellington, Manila and Taipei.

Regional energy firms were the big winners, with Santos surging more than two percent in Sydney and while Hong Kong-listed PetroChina climbed more than three percent.

Markets had all been well up before news of the strike, thanks to ongoing optimism fuelled by the China-US trade agreement, looser central bank monetary policies and easing Brexit worries.

"Investors are worried that the situation in Iran will worsen, since there could be some retaliation," said Steven Leung at Mizuho Bank. "People will want to cut risk ahead of the weekend. Stocks have rallied a lot in the past month or so, so any bad news flow is a reason to take profit."

Key figures around 0710 GMT

West Texas Intermediate: UP $1.73 at $62.91 per barrel

Brent Crude: UP $1.96 at $68.21 per barrel

Hong Kong: Hang Seng: DOWN 0.3 percent at 28,468.23

Shanghai: Composite: DOWN 0.1 percent at 3,083.79 (close)

Tokyo - Nikkei 225: Closed for a public holiday

Pound/dollar: DOWN at $1.3120 from $1.3139 at 2200 GMT

Euro/pound: UP at 85.14 pence from 85.02 pence

Euro/dollar: DOWN at $1.1170 from $1.1172

Dollar/yen: DOWN at 108.12 from 108.54 yen

New York - Dow: UP 1.2 percent at 28,868.80 (close)

London - FTSE 100: UP 0.8 percent at 7,604.30 (close)