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%.

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