Conflict hits Israeli shares

The closure of many shops and restaurants could hurt the economy

Fears that violence in the Middle East could hurt the Israeli economy have sent the Israeli shekel and shares there plunging.

One dollar bought just over four shekel on Thursday, its lowest level since late June.

The blue chip Tel Aviv 25 index ended down 7.9% at 473.48 points, while the broader Tel Aviv 100 index closed 7.5% lower at 468.98 points.

As shops and restaurants shut, some estimates suggest the clashes between Palestinians and Israelis could lead to a 1% drop in forecast growth of 5% this year.

The latest sell-off in shares was prompted by comments from deputy Prime Minister Benjamin Ben-Eliezer, who told Israel radio that peacemaking was dead.

"Its simply an atmosphere of war," a dealer at Eurotrust said.

The technology sector - an important and growing part of the Israeli economy - was also weighed down by weakness on global technology markets.

Rude awakening

Finance minister Avraham Shohat has warned that "the clashes will affect our economy if they are prolonged".

If it lasts a month the violence would cause a cut in growth rates to 4.2% from a previous forecast of 5% - a loss of $700m for gross domestic product, said Israeli Manufacturers' Association president Oded Tira.

It was only on Tuesday that investors realised the seriousness of the situation, analysts said.

"The market last week under-reacted. There was a false assumption that (the fighting) would pass...or an agreement would be reached," Ira Slomowitz of the IBI Investment House said.

"They now realise that this is not going away very quickly."

Investors have had a "rude awakening to the fact the peace process is very fragile," Richard Gussow, an analyst at Lehman Brothers agreed.

Shut for business

The total closure of the West Bank and the Gaza Strip is also set to have a major impact on the economy.

Many of the 100,000 Palestinians who travel to work every day in Israel are without work.

Many restaurants, public works companies and other companies that rely on unskilled labour have also been hit.

The agriculture minister has called on the government to temporarily remove import duties on fruit and vegetables from Europe. This will compensate for a halt in supplies from the Palestinian territories.

Tech boom and bust

The technology sector forms an important part of the Israeli economy and these shares have also dropped heavily.

This drop was in part because of global weakness in telecom and technology shares.

The sector has enjoyed annual growth of between 15% and 20% in Israel in the last decade and, with high-tech exports reaching about $7bn a year, the sector counts for nearly half the country's total sales abroad.

Some analysts say that this sector is shielded from the impact of the violence as most of its revenues are generated abroad.

But the ongoing conflict prompted Israeli digital graphics company Scitex Vision to postpone its planned listing on Frankfurt's Neuer Markt.