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The local stock market underwent a wild fluctuation, Monday, rattled by fears of an Iran-Israel conflict and dashed optimism of an earlier-than-expected rate cut by the U.S. Federal Reserve.

Experts say a short-term adjustment of the Korean equity market is inevitable, since the emerging market with little natural resources is extremely vulnerable to currency depreciation against the U.S. dollar and global oil price volatility.

Further amplifying the concern is overall losses in the value of undervalued local shares, almost all of which reversed months of sharp gains due exclusively to the landslide victory of the main opposition Democratic Party of Korea (DPK) in last week's general elections.

The Yoon Suk Yeol administration's Corporate Value-up Program, designed to buoy the chronically stagnant local stock market, has essentially lost momentum alongside a slew of his fiscally conservative economic policy drives, market watchers say.

According to the Korea Exchange, the benchmark KOSPI ended at 2,670.43 points, down 0.42 percent from the previous session.

Large-cap shares retreated earlier in the day, including Samsung Electronics, SK hynix, LG Energy Solution and POSCO Holdings. The drop was in a range of between 1.27 percent and 2.3 percent.

The small-cap tech-heavy Kosdaq ended lower at 852.42 points, down 0.94 percent from the previous session.

The primary factor for Monday's intraday market tumbles was mounting concerns over Iran's drone strikes on Israel escalating into what observers fear would trigger a fifth Middle East war.

According to U.S. media outlets, U.S. President Joe Biden called Israeli Prime Minister Benjamin Netanyahu shortly after Iran's attack, urging him against launching a counterattack on Iran.

NH Investment & Securities researcher Kim Young-hwan said the local stock market fell due to geopolitical risks, but the possibility of war is limited.

"Further escalation to a full-fledged war is not likely, as indicated by the initial response of both the U.S. and Iran," he said. "The future movements of the stock market will be determined by factors including corporate earnings, the timing of the Fed's pivot and oil prices."

Hi Investment & Securities researcher Park Sang-hyun said the weakening of Korea's currency is expected to weigh on the local stock market.

The surging oil prices remain the single largest variable for the currency trajectory, in his view.

"The oil prices exceeding the psychologically significant $90 level will result in the Korean won sliding sharply to 1,400 won against the U.S. dollar. This in turn will prove a major drag on the stock market."

Also coming into play is strengthening inflationary pressures, a development that pushes back Fed rate cuts by months, according to the researcher.

"Elevated geopolitical risks in the Middle East will push up the oil price, prompting overall rises in prices of goods. With sticky inflation already a major cause for concern, central bankers in the U.S. and by extension Korea will find it hard to make a dovish pivot," Park said.