Tel Aviv shares fell on Sunday with analysts citing investor jitters over planned judiciary changes by Israel's hard-right government and after a Palestinian terrorist killed seven people outside a synagogue on Jerusalem's outskirts.
The blue-chip Tel Aviv 35 index .TA35 was 1.% lower in afternoon trade, while the broader TA-125 index .TA125 dipped 1.7%.
Government bond prices were down as much as 1%. While the currency market is closed on Sunday, the shekel ILS= depreciated 2% versus the dollar on Thursday and Friday.
Economist: Shekel is weakening due to judicial reforms
Jonathan Katz, chief economist at Leader Capital Markets, said stocks fell "for the same reason the shekel is weakening - concern regarding the judicial reform."
Prime Minister Benjamin Netanyahu's office declined to comment to Reuters. On Friday, Netanyahu defended his cabinet's proposed legal shake-up, which seeks stronger political control over bench appointments while weakening the Supreme Court's ability to rule against legislation or policy.
Critics have said the move will compromise the independence of the judiciary and undermine Israel's democratic system of checks and balances.
In a meeting with Israeli business people, Netanyahu said the courts would remain independent and that Israel's robust economy would grow stronger.
However, Uri Levin, chief executive of Israel Discount Bank DSCT.TA, told Netanyahu that in recent days, foreign banks and investors had been selling State of Israel bonds and shekels, leading to a widening of the yield spread between US and Israeli bonds, a Discount spokesperson confirmed.
Weekend's terror attacks are 'another piece of the puzzle'
Hours later, a Palestinian terrorist shot dead seven people outside a synagogue on Jerusalem's outskirts, and a second terror attack occurred in the city on Saturday, prompting Netanyahu to promise a "strong, swift and precise" response.
"The shootings are just another piece of the puzzle" of negative sentiment in Israel, said Bank Leumi chief economist Gil Bufman, pointing to overall market concerns about a weakening economy, inflation, and a higher budget deficit.
"The question arises as to what the government's response is going to be?" Bufman said, adding that the judicial changes were also spooking investors.
The planned overhaul has brought tens of thousands onto the streets of Tel Aviv and other cities, and economists have urged Netanyahu to reconsider on fear the changes will politicize the judiciary and erode its independence.