The benchmark S&P/ASX200 index jumped 86.9 points by midday on Monday to be 0.99 per cent to 8,859.2, as the broader All Ordinaries advanced by 86.1 points, or 0.96 per cent, to 9,027.6.
Iranian officials have agreed to halt their attacks on US targets in the Middle East, as long as the current pause on US airstrikes on Iran holds.
"As we head into the new week, hopes are rising that a genuine de-escalation and return to diplomacy is underway," IG market analyst Tony Sycamore said.
"A return to the 14-point memorandum of understanding with a little more clarity around control of the Strait of Hormuz would be a solid starting point."
De-escalation hopes sent oil prices sharply lower, with Brent crude trading just below $US88 a barrel, down roughly $US10 since Saturday morning.
Energy stocks followed suit, tumbling almost four per cent as oil, gas and coal producers all fell behind, while uranium stocks were mixed but broadly lower.
Woodside and Santos both dived more than 3.9 per cent each, despite Woodside winning special project status for its North West Shelf Project and Santos loading and selling its first condensate cargo from its Barossa gas project.
Miners rebounded from Friday's sell-off, led by gold producers as the precious metal topped $US4,107 ($A5,868) an ounce.
Mega miners BHP and Rio Tinto gained more than 1.4 per cent each, as both copper and iron ore futures edged higher.
Financials gained 0.7 per cent, hitting three-month highs with some help from the big four banks and Macquarie.
Technology stocks also recovered most of Friday's losses with a 3.4 per cent surge, but the sector is still down 44 per cent since the same time in 2025.
In company news, Myer sank seven per cent after its June quarter update painted a gloomy picture of consumer spending, as inflation, high interest rates, and weak income growth weighed on sales.
Evolution Mining announced it will acquire Carnaby Resources in a $213 million scrip deal, which sent Carnaby's share price rocketing by more than 60 per cent to the 77 cent offer price.
The Australian dollar was buying 70.05 US cents, up from 69.83 US cents on Friday at 5pm, with the currency broadly stronger after last week's surprise jobs number heightened the odds of incoming interest rate hikes.
Investors will be closely watching Wednesday's June inflation print for more clues on the rates outlook.
"For now, at least one more hike before the end of the year looks increasingly likely, although August remains a live but finely balanced call," said Josh Gilbert, lead analyst for APAC at trading platform eToro.
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