The shekel slid more than one percent to a two-month low against the dollar on Wednesday after Israel killed the military commander of Hamas in an airstrike that investors fear could trigger a new wave of violence.
"It caught the market sleeping," said Dan Biro, a dealer at Israel Discount Bank, of Israel's action which came in response to more than 100 missiles fired out of the Gaza strip the past few days. "It's a very big kill."
Islamist Hamas said Ahmed Jaabari, who ran the organization's armed wing, Izz el-Deen Al-Qassam, died along with a passenger after their car was targeted by an Israeli missile. Israel warned of more strikes while Hamas and other militant groups have vowed a strong response.
Israeli markets typically shrug off Israeli-Palestinian violence, but dealers said investors fear Hamas may have longer-range missiles than in the past that could wreak havoc on Israel's south.
Biro said the market had expected some sort of Israeli reprisal for its rocket barrage but "not this massive."
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