Tel Aviv stocks closed off 0.6% Thursday on NIS 517 volume, relatively low for options expiry due to concern about another interest rate hike, and to 1.5% drops in Europe.

On Wednesday shares slumped 2.8% in response to reports of treasury plans for a tax on capital gains.

The Maof-25 blue chips index and the TA-100 index each closed off 0.6% Thursday, and technology shares closed off 0.5%.

Options on the Maof-25 index for April expired, the options index closing up 0.5% to 388.2.

Earlier in the session blue chips dropped 1.8%, in line with heavy drops in European markets.

Market players said that the drops in the last two trading days indicate that the market is anticipating a 1.2% interest rate hike. They said that Bank of Israel Governor David Klein is going to "punish" the treasury for failing to fulfill its commitment to cut the government budget.

Youth-oriented casual clothes maker Fox, on its first day of trading, attracted a fine NIS 2.3 million volume, rising to NIS 26.44. Fox is the first company to go public on the Tel Aviv Stock Exchange in two years.

Israel Chemicals stood out with 1.9% gains on NIS 31 million volume. The rise is probably in response to the results released by Canadian chemicals giant Potash Corporation of Saskatchewan (NYSE:POT), which posted 12% growth in potash sales in Q1, despite prices sliding by 2%. PotashCorp expects results to improve given anticipated increase in agricultural land worldwide, and especially in the United States. The firm expects expansion in land allocated for growing corn, a fertilizer-intensive crop.

Bank Hapoalim closed down 1.1% on the session's biggest volume, NIS 59 million, adding to Wednesday's 2.7% slide.

Investment bank Merrill Lynch downgraded Bank Hapoalim for the short and medium terms from Strong Buy to Neutral. Merrill Lynch doesn't expect bank stocks to recover in the short term given the economic impact of the escalated security situation. Merrill Lynch estimates that imposing tax on the stock exchange as planned by the treasury would cut volumes of trade, and consequently hurt bank brokerage revenue.

Bank Leumi climbed 0.2% on NIS 45 million volume, after yesterday closing down 4.4%.

The big drops posted by the banks on Wednesday came in response to reports that debt-burdened cable TV firm Tevel is likely to ask its bank creditors to forgive hundreds of millions of shekels in debt. In 2001, the banks wrote off communications sector debt worth hundreds of millions of shekels.

Tevel's debt to Bank Leumi comes to NIS 957 million, and to Bank Hapoalim, NIS 494 million.

Tevel's debt is expected to have even greater impact on controlling shareholder IDB. IDB Holding Corporation closed off 0.5%, IDB Development Corporation closed down 1%, and subsidiaries Clal Industries and Discount Investments dropped 2.1% and 2.7% respectively. On Wednesday, IDB group stocks dropped sharply after TheMarker reported that the banks informed Tevel they won't forgive its debt, and that they expect IDB to inject money into Tevel or the banks will demand the appointment of a receiver.

Drug giant Teva Pharmaceuticals (Nasdaq:TEVA) closed unchanged despite opening on 0.5% positive arbitrage spread. Teva attracted big volume, NIS 52 million. Bank Hapoalim rated Teva a Buy, projecting sales in Q1 will come to $547 million, 11% above Q1, 2001, and 39% profit growth to $76 million.

Cellular provider Partner Communications (Nasdaq, TASE:PTNR, LSE:PCCD) closed up 2%. Investment bank UBS rated Partner a Buy, setting $7 as price target, 56% above the share's Nasdaq price.

Nice Systems (Nasdaq:NICE) climbed 2.2%, and Elron Electronic Industries (Nasdaq:ELRN) closed off 1.7%.