Despite increased tensions in Gaza and a potentially deteriorating sense of security, the domestic market has reacted in a measured response say analysts, who forecast upside in Tel Aviv towards the end of the year. "The recent declines on the Israeli stock market are mostly a story of the decline in global markets," said Vered Dar, chief economist at Psagot Ofek. "When we look at January, when Ariel Sharon fell ill, the markets plunged initially but regained, while foreign investors did not engage in major selling as the domestic and world-wide sentiment was positive." Israeli stocks fell 1.8 percent on the benchmark TA-25 index hitting a four-month low on Sunday after two Israeli soldiers were killed and one was kidnapped when Hamas and other Palestinians attacked an army post just within Israel's border with the Gaza Strip. The TA-25 index sank below the 800-point mark, some 11% below its peak above 900 points less than two months ago. On Monday, the TA-25 regained 0.15%, while the TA-100 rose 0.14% "This was the first serious incidence in some time but the negative momentum was here before. Sunday was the icing on the cake." said Gil Shilo, an equity trader at Israel Brokerage & Investments Ltd. "The market has been pretty weak mainly due to concerns about interest rate hikes in Israel and the US and declining global markets." On Monday evening, the Bank of Israel left rates unchanged at 5.25%. The US Federal Reserve is widely expected to raise rates when it releases its next decision on Thursday. Analysts at Excellence Nessuah expect continued pressure on equities due to the increased tensions in Gaza and the increased unlikelihood of near-term negotiations between Israel and the Palestinians. "We expect further incidents on both sides, but the overall situation will not escalate into a full-scale conflict," said Excellence's Dan Farhi. IBI's Shilo, meanwhile, added that in recent days trading volumes were low domestically and internationally, but foreigners had been engaged in a lot of selling lately, reducing their positions. "Foreigners have not been scared off following the attack, they are sitting on the fence like domestic investors. The outcome of the one-time shock to the markets will depend on how long it takes for the kidnapped soldier to be freed." Looking ahead, Dar at Psagot Ofek expects the stock market to bounce back towards the third or fourth quarter as interest rate hikes around the globe come to a halt. "If there are no more major global or domestic incidences, the market should end this year with a positive return similar to the beginning of this year." Similarly, Shilo forecasts that the stock market will see some positive sentiment over the next couple months on the back of good economic data. "However, I am not sure we are going to get to the 900-point mark as early as the end of this year," he said. Farhi at Excellence Nessuah was more positive, saying there was a good chance - once emerging markets stabilize - that the Israeli stock market would increase by 15% towards the end of this year and possibly rising above the 900-mark on the back of excellent corporate earnings results in the second quarter and one of the best macroeconomic years the country has seen.