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Gold prices slipped more than 2% on Monday, extending their drop to a roughly four-month low, as an escalating Middle East conflict stoked inflation concerns and expectations of higher global interest rates.

Spot gold was down 2.5% at $4,372.86 per ounce, as of 0238 GMT, extending losses for a ninth consecutive session. The metal, which fell on Monday to its lowest level since January 2, lost more than 10% last week.

U.S. gold futures for April delivery fell 4.4% to $4,375.60.

"With the Iranian conflict into its fourth week, and oil prices hanging around the $100 level, expectations have pivoted from rate cuts to potential rate hikes which has tarnished gold's appeal from a yield point of view," said Tim Waterer, chief market analyst, KCM Trade.

Escalating the three-week-old war, Iran said on Sunday it would strike the energy and water systems of its Gulf neighbours in retaliation if U.S. President Donald Trump follows through with a threat delivered a day earlier to hit Iran's electricity grid in 48 hours.

"Gold's high liquidity appears to be hurting it during this risk-off period. Steep selloffs on stock markets in Asia today are leading to a further unwinding in long gold positions," Waterer said.

Asian shares fell and oil prices stayed above $110 a barrel, as investors weighed U.S. and Iranian threats to target energy facilities. [O/R]

The closure of the Strait of Hormuz kept crude elevated, stoking inflation through higher transport and manufacturing costs. While rising inflation typically boosts gold's appeal as a hedge, high interest rates curb demand for the non-yielding asset.

Meanwhile, market pricing for a U.S. Federal Reserve interest rate hike this year has shot up, and is now seen as far more likely than a rate cut, as interest rate futures were pricing around a 27% chance of a rate hike by December, as per the CME FedWatch tool.

Spot silver lost 3.2% to $65.61 per ounce. Spot platinum fell 2.9% to $1,866.65 and palladium was down 0.5% at $1,397.25.