Tel Aviv stocks ended the turbulent Wednesday flat, after sagging as low as 2.5% to a three-year low as the shekel sank and Europe's markets stumbled. But Israeli stocks picked up after the trend in Europe reversed and the shekel rebounded, to a degree.

Stocks started down and dropped further, chiefly on worries about Israel's sovereign credit rating. The country's economic leaders winged it to Washington, ostensibly for an IMF meeting, but just as importantly to meet with the international rating agencies and lobby to keep Israel's paper at A-minus. Investors found their junket unpersuasive, judging by the market's reaction.

But after Standard and Poor's downgraded Israel's two biggest banks, Hapoalim and Leumi, to BBB+ - the nation seems next in line. Historically, Israel and its two biggest banks have always had the same rating.

This week Maalot has said it will rethink the rating of the two big banks, and yesterday Goldman Sachs chimed in, agreeing that Israel will be downgraded. The mad scurry to Washington to persuade the agencies that Israel is sound as a bell has spooked investors, as it attests to the seriousness of the matter, traders say.

That coupled with the violence in the territories and growing expectations of war with Iraq had Israeli stocks writhing, only to rebound on the shekel's resurgence.

The Maof-25 index finished down 0.1% to 349.4 points, the Tel Aviv-100 index lost 0.5% to 339.5 points and the TelTech-15 index ended off by 1.1%. Turnover was fairly high for this truncated Sukkoth day at NIS 170 million, apparently due to speculators trying to sway stocks ahead of the expiry of Maof-25 index options on Thursday;

DBM Investment House manager Rami Dror predicts that the expiry tomorrow will be a quiet affair, which has been the case for months.

Roy Laufer, the manager of Nessuah Zannex's institutionals desk, said that the dominant element in the market today was the shekel-dollar rate. The dollar started the day climbing to NIS 4.91, sparking a sell-off of stocks, after the papers reported concern in Jerusalem about a sovereign credit downgrade, as well as negative indicators regarding Israel's economy condition. But the Maof speculators may also have lifted the market, not wanting expiry at such a low level, Laufer added.

All eyes were on the bond market, where fluctuations have been greater than usual for days as the shekel weakens. The volatility is the best illustration of the nervousness gripping the market, mainly regarding the government's capacity for meetings its economic goals and targets, and regarding Israel's sovereign rating as well.

Yields on series 2680 bonds redeemable in 8.5 years reached 11.1%, some 1.4% above its peak in last June. Market players predict that if the uncertainty persists, the shekel will weaken even further and the bond market will see more drops.

Another point of interest in recent days has been the banks, which are sore and battered after their downgrade but rallied today after starting deep in the red. Weighty

Bank Hapoalim (TASE:

POLI

) ended up 2% after starting down 1% to NIS 7.05 per share, close to a 3.5-year low point.

Bank Leumi (TASE:

LUMI

) gained 0.5% after sagging 2% to a 3.5-year low.

Koor Industries

(NYSE:

KOR

) sank 5.2% on turnover of NIS 10 million to a record low for the year, due to sagging share prices of its subsidiaries and affiliates, including agrochemicals company

Makhteshim Agan Industries (TASE:

MAIN

), and

ECI Telecom

(Nasdaq:

ECIL

).

As Brazil's financial crisis picks up steam, Israeli companies doing business there are losing theirs. That includes Makhteshim, which sank 1.4% today. Another is foodmaker

Elite Industries (TASE:

ELEI

), which sells coffee over there, and retreated by 2.2%. A third victim is

Discount Investment Corporation (TASE:

DISI

), which holds shares in Global Telecom Village a Dutch-based company that sells telecommunications services in southern Brazil. Discount Investment Corporation however reversed from a hefty morning loss to end up 0.3%.

The market also had a beady eye trained on

Israel Salt Industries (TASE:

SALT

), which tumbled 22% yesterday on estimates that it will have to write down the book value of its 11.6% stake in Bank Hapoalim. As the bank's stock sinks, the unregistered gap between the stake's market value and its book value has reached NIS 770 million. Salt Industries started under the flatline but ended the session on a gain of 1.7%.