Shekel and Stock Market in Israel after the bloody thusrday

  TEL AVIV (Reuters)
Israeli markets sank on Thursday for a second straight day as Israel struck Lebanon in response to the capture of two soldiers by Hizbollah guerrillas, the worst fighting on the northern border in a decade.
The Israeli shekel <ILS=> weakened by as much as two percent against the dollar and stocks lost four percent in early trade as Israel attacked Beirut airport and Hizbollah fired rockets at Nahariya in northern Israel.
The benchmark Tel Aviv 100 index <.TA100> was off 3.7 percent to 766.61 points at 0819 GMT while the blue chip TA-25 <.TA25> shed 3.5 percent to 755.06.
"There was a bit of a panic, certainly among domestic investors, but not foreign investors," said Richard Gussow of Excellence Nessuah.
"The domestic investors thought foreigners would start a sell-off and we have not seen that at all."
On Wednesday the shekel, which last week hit a 13-1/2-month high against the dollar, slid more than 1 percent while the Tel Aviv share indices lost over four percent, the largest one-day drop in stocks since August 2005.
The shekel opened on Thursday at 4.54 shekels per dollar, compared with Wednesday's official rate of 4.4340 and its weakest level since April 26.
Within minutes though, the Israeli currency pared some of those losses and at 0819 GMT it was trading at 4.5052.
"The north (of Israel) is exploding," a dealer at the Union Bank of Israel said.
Israel intensified its reprisals on Thursday, enforcing a naval blockade in Lebanon's territorial waters.
Israeli attacks have killed 36 Lebanese civilians.
In the northern Israeli town of Nahariya, one Israeli civilian was killed and at least 21 wounded when Hizbollah rockets slammed into homes and apartment buildings.
The violence was the worst between Israel and Lebanon since 1996 when Israeli troops still occupied part of the south. It coincided with a major Israeli offensive into the Gaza Strip to retrieve a captured soldier and halt Palestinian rocket fire.
Israeli markets had grown used to attacks by Palestinian militants over the past few years, taking the view that any army retaliation would be swift and would not lead to full-scale war.
As a result, foreign banks have remained largely bullish on Israeli stocks.
The direction of the market now will depend on how long the violence continues.
"If it's a relatively short situation and the market senses it will be short we will see a recovery, " Gussow said. "If the situation is dragged out it will continue to weigh on equities."
The longer this goes on, the more of an impact it will have on the Israeli economy as well. Right now, Gussow said he does not see a significant impact.