The shekel rallied against the dollar to end Wednesday above its Tuesday closing rate. But it is still at a three-year low.
The crisis mood caused by attacks on the U.S. on Tuesday had eased and foreign markets rose, dealers explained.
The representative rate was set at 4.3380 to the dollar compared with 4.3450 shekels on Tuesday.
The dollar-shekel rate spent the day swinging violently on Wednesday.
"The day started where it had left off yesterday with the dollar rising in inter-bank trading but as nerves settled the shekel started to gain. When we saw the European bourses rising we realised the crisis mood had passed," said a dealer at Eurotrust.
"The pendulum moved the other way reasonably quickly as companies and banks made large dollar sales."
Dealers said the shekel, which has been falling sharply in the past two weeks would continue its fall in the coming weeks due to ongoing weakness in equity markets and Israeli-Palestinian violence which shows no sign of abating.
The shekel's record representative rate low of 4.36 to the dollar was seen in October 1998 sparked by global financial turmoil caused by deep economic problems in Russia and Japan.
The representative rate against the basket of currencies was set at 4.4362 compared with Tuesday's 4.4261.
On the crosses, the shekel traded at 3.6285 shekels per 100 yen compared with 3.5463, against the euro at 3.9307 shekels compared with 3.8950, and against the pound sterling at 6.3573 shekels from 6.3239 on Tuesday.
In late trading after the setting of the representative rate, the shekel was at 4.3414 to the dollar.
Hapoalim dealers said earlier that trade is very light because of the enormous spreads the banks opened. The banks apparently prefer to paralyze trade at first, until the picture clears up," said one dealer.
At opening the banks were quoting bid/ask rates at spreads of 2 agorot, or 200 pips, compared with the usual spread of 20 to 30 pips. Meanwhile the spread has dropped to 1 agora.
"At spreads like that, naturally it won't be trade as usual," said one dealer. "It shows how panicky the currency market is. People don't know where the market is or where it's going. They prefer not to take risks by taking positions through buying or selling dollars."
Yesterday dealers reported panic and widespread buying of dollars from all market participants. But at around 18:00, the shekel regained some ground to close the day at NIS 3.93. Dealers said that trading was chaotic as major financial centers around the world closed down. Volatility on derivatives, such as foreign exchange options, jumped 50% yesterday.