The benchmark S&P/ASX200 rose 39.1 points by midday on Tuesday, up 0.47 per cent, to 8,405, as the broader All Ordinaries gained 43.4 points, or 0.51 per cent, to 8,596.
The stock market had tumbled to its lowest level since May 2025 on Monday after Mr Trump threatened to "obliterate" Iranian energy infrastructure within 48 hours if it failed to open the Strait of Hormuz, a choke point for a fifth of global oil supply.
But Wall Street surged overnight and oil prices eased by more than 10 per cent after the president extended his deadline to five days as investors bet on the TACO - or 'Trump Always Chickens Out' - trade.
A chunk of the gains faded by the close of trading in the US after Iran denied any talks took place.
Sentiment had been very choppy ever since, Westpac economist Ryan Wells said.
"Markets are left striking a balance between welcoming the tentative news of possible de-escalation while weighing the immense uncertainty still clouding this progress," he said.
"These moves represent only a partial reversal of the price action that has taken place over recent days."
Oil prices eased by more than 10 per cent, with Brent trading closer to $US101 a barrel after hovering near $US115 on Monday.
Australia's basic materials stocks were the biggest benefactors, with the sector charging 2.8 per cent higher after tumbling to four-month lows in the previous session.
The sector is still in a technical bear market, down 20.5 per cent since the beginning of the conflict on February 28.
Iron-ore giants BHP and Rio Tinto rebounded just below three per cent each.
Gold miners staged a modest bounce after a brutal sell-down to kick off the week, as the precious metal jumped to $US4,360 ($A6,239) an ounce.
Northern Star and Evolution clawed back 1.9 per cent each, while the All Ordinaries gold sub-industry traded 2.4 per cent higher.
Copper producers outperformed the top 200, with Sandfire Resources and Capstone Copper up more than six per cent each.
The local energy sector faded 0.5 per cent as Woodside and Santos ran into profit taking, while coal producers were flat to negative and uranium stocks bounced.
The temporary removal of the worst-case scenario in the Middle East conflict supported airline stocks, with Qantas and Virgin up more than three per cent each.
Local banks were mixed, but NAB continued to trail its big four competitors, down one per cent, as CommBank eased 0.5 per cent to $173.43, while Westpac edged higher and ANZ surged 1.8 per cent to $36.91.
In company news, Myer shares lifted 1.7 per cent to 29.5 cents after growing its sales by almost a quarter in the six months to January 24, while net profit surged 32 per cent over the same period.
The Australian dollar was buying 69.86 US cents, up from 69.63 US cents on Monday at 5pm.
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