Donald Trump says a peace agreement to end the conflict involving Iran could be signed within days, raising hopes of a major breakthrough in one of the world’s most volatile regions.

Speaking from the Oval Office, Trump claimed a “great settlement” was close and suggested a deal could even be signed this weekend in Europe. He also said the agreement would reopen the Strait of Hormuz, one of the world’s most important oil shipping routes.

But Iran quickly poured cold water on the optimism.

Iranian officials said negotiations were continuing but stressed no final decision had been made, with key issues including sanctions and security guarantees still unresolved.

The latest developments follow months of escalating tensions, military strikes and fears the conflict could spiral into a broader regional war.

Trump had earlier threatened military action against Iranian oil infrastructure before later backing away from further strikes, saying negotiators were close to finalising terms.

Financial markets reacted swiftly to the prospect of calmer conditions in the Middle East.

Oil prices fell sharply overnight after Trump’s comments eased fears of major supply disruptions through the Strait of Hormuz. Analysts said investors were betting any reduction in tensions would help stabilise inflation and global energy markets.

The Australian sharemarket also lifted significantly as traders responded positively to signs the conflict may not escalate further.

For Trump, a diplomatic breakthrough would also come at an important political moment.

Recent Reuters/Ipsos polling has shown his approval rating sitting near the lowest levels of his presidency, amid voter concerns over inflation, fuel prices and growing international instability.

Despite Trump’s confidence, uncertainty remains high.

While negotiators appear closer than they have been in months, officials on all sides have warned talks could still collapse if sticking points cannot be resolved quickly.