The Defence Secretary said that a “third party attack” on Iran’s nuclear programme could choke oil supplies from the Gulf, driving up oil prices.
That would then have “a direct effect” on the UK economic recovery, he told MPs and peers.
Mr Hammond was giving evidence to Parliament’s joint committee on national security strategy when he was asked about the consequences of an Israeli strike on Iran’s nuclear programme.
He replied: “Firstly, the Government firmly believes we should continue to pursue the diplomatic route in persuading Iran to abandon its nuclear ambtions, but in doing so we should take nothing off the table.”
However, he added, a military confrontation with Iran could have harmful economic consequences.