TEL AVIV -- The stock market here plunged Thursday following the most serious standoff yet between the Israeli army and Hezbollah troops since Israel withdrew from southern Lebanon in 2000.

The Tel Aviv 25 index, representing the country's largest corporations by market capitalization, fell 4.25% and has now fallen 8.2% in the last two trading days. The Tel Aviv 100 index fell 4.1% Thursday and is down 8% since Tuesday, while the banks index got slashed by 5.35%, bringing its two-day decline to 10%. Many investors view Israeli bank shares as being most exposed to a possible economic downturn as consumer spending gets hurt.

"There is a certain panic in the market," says Gilad Altshuler, investment manager at the Tel Aviv-based brokerage firm Altshuler Shaham. "People are selling every type of security; we see it especially in currency trading and in declines in government bonds."

The local currency, the shekel, has dropped about 2.5% compared to the dollar in the last two days.

"Most of all, there is no selectiveness among the selling of various securities," Altshuler adds. "Everyone is getting cut regardless if they are export-oriented companies that really shouldn't be affected at all by what is happening in the country."

Early Wednesday morning, Hezbollah opened a multiple-front attack on Israel's northern border, killing eight Israeli soldiers and kidnapping two others. Israeli forces retaliated with a wide attack on various Lebanese infrastructure targets, including the bombing of Beirut's airport, killing dozens, according to published reports. Hezbollah continued shooting missiles on Israeli cities, including the port city of Haifa.

Although the Israeli government has yet to announce a concrete strategy or timeline, various military experts and economists are estimating this situation may continue for several weeks.

Among the major companies that fell in Thursday's trading is the diversified holdings company Africa-Israel Investments, which lost 6%; the renewable-energy utility Ormat Technologies ( ORA), which dropped 2.4% on the Tel Aviv market and 3.3% in New York; the real estate conglomerate Gazit Globe, which owns the U.S.-based REIT Equity One ( EQY), declined 2%; Israel Chemicals Corporation fell 2%; and the holding company Delek Group dropped 4%.

Meanwhile, Israeli stocks trading in New York were getting hit as well, chased by their Middle Eastern connection and further pressured by rising oil prices and an overall weakness in major U.S. indexes. Teva Pharmaceuticals ( TEVA) fell 3.5% to $30.51, and Perrigo ( PRGO) declined 3.8% to $14.93 a share in New York.

Despite an upbeat buying opportunity recommendation by HSBC, shares of NICE Systems ( NICE), the digital recording and analysis company, slid 5% Thursday and have fallen more than 10% in the past two days. Saifun Semiconductors ( SFUN) dropped 3%, and Orbotech ( ORBK) declined 3.6%.

Altshuler estimates that most of the export-oriented companies are due for "a quick correction."

Even if the geopolitical turmoil persists or gets worse, "there is no reason for the large exporters to be affected," he says, adding that these companies are "an absolute buying opportunity." Altshuler owns, and recommends, all the above mentioned securities.

Economists from Bank Hapoalim wrote Thursday they expect slight declines in consumer spending in the near future, and that they will be most felt in the tourism industry. Israel is "starting a period of uncertainty that will not be a short one," the bank says.

Still, Israel's economy has proved resilient to unrest in the past, Bank Hapoalim notes. A low inflation rate, strong corporate earnings and a balanced fiscal policy will protect Israel's market from a serious hit, they say.

With $11 billion in foreign investment streaming into the local market in the first half of this year -- equivalent to the record amount of investment recorded during all of 2005 -- and a growth rate of over 5%, many investors are optimistic about the country's economic resilience.

During the May-to-June selloff, as the S&P 500 shed 5% and international markets such as Japan and Brazil crashed by 18% and 22%, respectively, the Israeli market fell less than 13%. Since then, it has managed to rise 6% in less than two weeks, only to fall back to an eight-month low depressed by this unexpected conflict.

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