Iran has withdrawn from peace talks with the United States and threatened to launch an attack on Israel after the Netanyahu administration announced plans for an air strike on neighbouring Lebanon.

According to a state-affiliated news agency, Tehran has vowed to hit back at northern Israel if Lebanon is hit by Israeli strikes and end “talks and exchange of texts through intermediaries” with the US until Israel ends its offensives in both Gaza and Beirut.

In a dramatic escalation of the conflict in the Middle East, Benjamin Netanyahu announced on Monday Israel’s plans to hit Beirut’s southern suburbs with a round of missile strikes. The Israeli Prime Minister ordered the offensive after the country’s military seized a strategically important fortress in southern Lebanon, marking its deepest incursion into its neighbour in more than half a century.

Iran said both the incursion and Netanyahu’s decision to order a strike constituted a transgression of the fragile ceasefire that has held across the region over the past two months and vowed to retaliate.

Iran’s military warned residents in Northern Israel to leave in the event that Neyanyahu follows through with its planned attack on Beirut’s southern suburbs. It also said it was highly unlikely the peace deal could be struck without a rapid deescalation from Tel Aviv.

Stocks down, oil up on latest Iran flare-up

The updates caused an immediate surge in the price of oil, while equity markets dropped. Brent crude rose back to $97 a barrel, having fallen more than 11 per cent last week on hopes that negotiators were nearing an agreement. Meanwhile the FTSE 100 fell by more than half a percentage point on the news, closing the trading session down 0.68 per cent.

Donald Trump said Tehran had not formally told the US it was suspending peace talks, but added that “going silent would be very good” because his team and the Iranian regime had “been talking too much”.

“It’s an appropriate thing to say, because they’re better negotiators than they are fighters,” the US President told NBC News.

“It doesn’t mean we’re going to go and start dropping bombs all over there,” he added. “We’ll keep the blockade.”

Tensions over Israel’s latest offensive were the second threat to the delicate ceasefire in just the past two days, after the US and Iran traded strikes over the weekend. On Monday, US Central Command said it had launched “self-defence strikes” on several Iranian military sites, after Iran shot down one of its drones.

The flurry of strikes and counter strikes – and the ramping up of Israel’s military operation in Lebanon – upends a period of thawing tensions across the region. A flurry of reports last week suggested Washington and Tehran were nearing a deal after months of negotiations, which would mandate the full opening of the vital Strait of Hormuz shipping lane.

In a social media post on Monday, Trump said the peace deal would “work out well” and urged people to “sit back and relax”.