Seoul shares closed lower for the third consecutive day Wednesday as investors sat on the sidelines amid the escalating tension in the Middle East following Iran's massive missile attack against Israel. The local currency fell against the US dollar.

The benchmark Korea Composite Stock Price Index dropped 1.22 percent, or 31.58 points, to 2,561.69.

Trading volume was moderate at 341.9 million shares worth 9.38 trillion won ($7.1 billion), with losers far outnumbering winners at 705 to 177.

Foreigners dumped a net 305 billion won worth of local shares, while individuals scooped up a net 987 billion won. Institutions dumped a net 705 billion won.

Iran fired a barrage of around 180 ballistic missiles at Israel on Tuesday (local time), in what Tehran said was retaliation for the recent killings of top Hezbollah and Hamas officials.

Investors also took a wait-and-see stance after Federal Reserve Chair Jerome Powell hinted the Federal Open Market Committee is not in a hurry to slash rates.

"The overall fear was not alleviated amid news reports that Iran is preparing for a second attack, with Israel vowing to retaliate," said Kim Ji-won, an analyst at KB Securities, noting that investors are rushing to safer assets.

Defense shares gathered ground amid the geopolitical tension in the Middle East, with LIG Nex1 rising 3.79 percent to 219,000 won and Hanhwa Aerospace increasing 4.21 percent to 309,500 won.

Carmakers finished bearish, with Hyundai Motors losing 2.89 percent to 237,000 won and its sister Kia decreasing 1.2 percent to 98,700 won. Auto parts maker Hyundai Mobis shed 1.38 percent to 214,500 won.

Chemical shares closed weak, with LG Chem falling 0.84 percent to 353,500 won and SK Innovation decreasing 0.85 percent to 116,100 won. Amorepacific plunged 7.04 percent to 137,300 won.

Top tech giant Samsung Electronics fell 0.33 percent to 61,300 won, and No. 2 chipmaker SK hynix lost 169,100 won.

The local currency was trading at 1,307.8 won against the US dollar, down 11.5 won from the previous session. (Yonhap)