Israeli share prices fell more than 2 percent on Thursday, weighed down by losses on Wall Street and a flare-up in fighting on the Israel-Lebanon border.
At 1046 GMT, the blue-chip Tel Aviv 25 index .TA25 was down 2.5 percent while the broader TA-100 .TA100 was 2.6 precent lower in low volumes.
Share indexes in New York dropped about 3 percent on Wednesday but traders said only part of the Israeli market's decline was a reaction to the Wall Street declines since European shares were down about 1 percent.
Earlier on Thursday, rockets were fired from Lebanon into Israel, prompting Israeli artillery fire.
"Half (of the losses) is because of Wall Street and half is because of the conflict," said Avi Weinreb, a trader at the Clal Finance brokerage in Tel Aviv.
Tel Aviv stocks had been performing well during nearly two weeks of fighting with Hamas militants in Gaza, gaining about 10 percent.
Investors were confident the Israel-Hamas conflict would be short due to international pressure to end the fighting.
But it could hurt the market if the conflict spread to Lebanon, traders said.
Still, the market views the rockets from Lebanon as an isolated incident and as a result indexes have been stable since the initial drop.
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