A market sell-off resumed on both sides of the Atlantic on Thursday as fears mounted that there would be no quick resolution to the conflict in the Middle East.

Early gains in European markets, which had followed a rebound in Asia, were wiped out in later trading and Wall Street was also trading sharply lower by early afternoon in New York.

The US-Israel war with Iran has driven up the price of oil and gas, triggering fears of a renewed inflation shock and dampening hopes of interest rate cuts.

In London the FTSE 100 closed down 1.5% or 154 points at 10,414; while Germany’s DAX and Italy’s FTSE MIB both fell 1.6%. France’s CAC closed down 1.5% and Spain’s IBEX was down 1.4%.

In the US the Dow Jones was down 2%, the S&P 500 was down 1.3% and the Nasdaq was off about 1%.

Meanwhile oil prices continued to rise, with a barrel of Brent crude up 4% on Thursday at nearly $85 (£63.80). European gas prices were up more than 3%. Brent crude has jumped 15% in the past five days.

“The optimism which helped lift Asian and European markets early in the day evaporated like water droplets on a smouldering stove top,” said Danni Hewson, head of financial analysis at AJ Bell. “It’s becoming harder to see a quick resolution to the conflict in the Middle East and that in turn is forcing markets to look again at their interest rate expectations for the coming months.”

In the UK, the more domestic-focused FTSE 250 closed down 0.9%, at 22,700.20. Among the biggest fallers was Wizz Air, which has cancelled flights to and from Israel, Dubai, Abu Dhabi and Amman until 15 March, as the airline warned of a €50m (£43m) hit to annual profits, also reflecting the impact of higher jet fuel costs. Its shares fell 11.3%.

FTSE 100 airlines were also affected, with easyJet shares dropping 5% on Thursday and British Airways’ owner IAG down 2%.

Treasury yields in the US were on track to rise for a fourth consecutive day, as higher oil prices began to cast doubt on immediate interest rate cuts by the Federal Reserve.

Markets are likely to improve if tankers can start moving through the Strait of Hormuz, which has been in effect closed by Iran since the weekend. About a fifth of global oil and liquefied natural gas supplies run through the Strait, located off Iran’s southern coast.