Shares of oil giant Saudi Aramco fell 1.7% to their lowest level since listing last month in a record initial public offering (IPO).
Aramco shares dropped to 34.55 riyals a share, the lowest level since it started trading last month.
Iranian military commander Qassem Soleimani, the architect of Tehran's overseas military operations was killed on Friday in a U.S. drone strike on his convoy at Baghdad airport.
The Kuwaiti index, the best performer in the region in 2019, was down nearly 4.1%, while Saudi stocks plunged 2.2%.
Dubai stocks were down 3.1% with property firm Emaar Properties falling 3.7%. The Abu Dhabi index fell 1.41%.
Banks also took a beating, with Al Rajhi Bank down 2% and Samba Financial Group down nearly 3%.
"A U.S.-Iran war could shave 0.5 percentage points or more off global GDP, mainly due to a collapse in Iran’s economy, but also due to the impact from a surge in oil prices," Jason Tuvey, senior emerging markets economist at Capital Economics, said in a note last week.
Saudi credit default swaps <SAGV5YUSAC=MG>, which investors buy as protection against default, rose by more than 13% on Friday following Soleimani's killing, Refinitiv data showed.
Regional bond spreads are expected to widen on Monday, when international debt markets open, because of increased political risk, a debt banker said.
Oil prices jumped to $63.05 a barrel on Friday, their highest level in more than three months, after Soleimani's killing sparked fears that conflict in the region could disrupt global oil supplies.
(Reporting by Saeed Azhar and Davide Barbuscia; editing by Jason Neely and Raissa Kasolowsky)