TEL AVIV, Israel -- Israel's capital market showed surprising resilience this week amid continued unrest between Israel and Hezbollah forces in Lebanon and an escalating situation on both the Gaza and West Bank fronts. Israeli ADRs were lower early Friday in New York but had been largely supported this week by signs of a possible halt in interest rate hikes, which rippled through numerous emerging markets.

The Tel Aviv 25 index closed up 1.2% on Thursday and was up 2% this week, after falling nearly 10% during the first two days of the fighting. The TA 100 index was up 3% this week, and the Tel Aviv Real Estate 15 index closed 5.5% higher. The Tel Aviv Stock Exchange is closed on Fridays.

"Israeli institutional investors have been buying since Sunday, but the market

Thursday was lifted more by Wall Street than anything else," said Danny Farhi, head of institutional sales at Excellence Nessuah, an Israeli investment house. "Interestingly, the market came back up close to the prewar levels. Now the question is: How much is this going to damage the economy?"

Credit rating agency Fitch says it expects Israel's debt-to-GDP ratio, which fell below 100% last year thanks to the government's tight spending control and buoyant corporate revenue, will "continue to fall in all but the most extreme of downside scenarios." Fitch continues to forecast a 2006 GDP growth of over 4%, which correlates to a consensus among Israeli economists expecting only a slight decline in GDP, of roughly 2 to 4 basis points, due to these events.

CIBC and Merrill Lynch both issued upbeat reviews on Israel this week. CIBC opined that Israeli companies in New York were already trading at historically low multiples even before the events in Lebanon began. Among them, CIBC noted


( SCOP), the digital video networking provider, which recently traded at a price-to-earnings ratio of 27.3, just below the industry average of 28.6, and

Ceragon Networks

(CRNT) - Get Report

, which specializes in wireless networks for mobile phones.

CIBC also recommends

Ness Technologies

( NSTC); the IT business solutions provider is currently trading at 17.2 times its 2006 projected earnings, significantly lower than the 20.9 average industry.

Merrill estimates that the Israeli economy hasn't been significantly damaged by the confrontation, although prolonged fighting could lead to a fragile market. Merrill recommends export-oriented companies such as

Israel Chemicals

or telecommunications companies such as the cellular company

Partner Telecommunications

(PTNR) - Get Report

, which could profit from high cell-phone usage.

Farhi closely follows the investment trends of foreign institutions in the Israeli market, and he notices that on the first two days of the war, large foreign investors were actually the ones doing the heaviest buying on the exchange, while Israeli private investors were "dumping like crazy." Now, Farhi says, the foreigners are taking a wait-and-see approach, maintaining their portfolios but not increasing positions that much.

Earlier this week, Israel's Defense Minister Amir Peretz made it clear that the Israeli government will continue attacking Hezbollah sites in Lebanon for as long as it takes to reach its objectives. "We don't have any intension of stopping the battle without reaching a significant change in the positioning of forces," Peretz said. "Hezbollah will no longer sit on the border, and there is no way Hezbollah would be allowed to continue to arm itself on our border."

Peretz added that Israel would adhere to U.N. resolutions if foreign forces are placed along the border and its kidnapped soldiers are returned.

"We are not going back to settle in Gaza, nor are we going to occupy Lebanon all over again. We have other ways to operate without sinking into the Lebanese swamp," he said.

Meanwhile, ground combat has begun; four Israeli soldiers and two Hezbollah guerilla men were killed on Thursday. The Israeli army is reportedly preparing for a wider ground operation, already recruiting reserve battalions and streaming infantry units to the northern border.

Missile strikes by Hamas toward Israeli southern cities and settlements, coupled with more clashes in the West Bank, added fuel to the tension.

Hundreds of Katyusha missiles that hit northern cities in Israel also forced the shutdown of many factories and high-tech centers in the area. Companies such as


, a Galilee-based metalworks company recently purchased for $4 billion by

Berkshire Hathaway

( BRK-A), have reportedly closed their Israeli operations.

In more positive news, the downpour of missiles on Galilee didn't stop Shamrock Holdings, a private equity fund that also manages the Disney family's investments, from buying the Galilee-based footwear company

Teva Naot

on Wednesday. Shamrock agreed to purchase 66% of Teva Naot, with an option to increase its holdings to 83% at a company valuation of about $29 million. Teva Naot exports 70% its footwear and flagship Teva sandals.

Elsewhere, the $2.2 billion U.S. venture capital fund

Greylock Partners

said earlier this week that it launched a $150 million fund dedicated to investments in Israel. To date, Greylock has invested in eight Israeli early-stage technology companies.

In earnings news, the giant billing software company


(DOX) - Get Report

said its fiscal third-quarter earnings, adjusted to stock option charges, were $626 million, or 49 cents a share, up 11% from last year. Results handily beat the average earnings estimate of 46 cents a share according to Thomson First Call. Amdocs' shares rose 10% on Thursday on its earnings announcement.

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