* Says central bank not seeking profits
* Shekel at 2-year peak at 3.6450 per dollar
* Hints at further interest rate increases
(Adds details, quotes)
By Steven Scheer and Ari Rabinovitch
JERUSALEM, Oct 3 (Reuters) - The Bank of Israel will continue buying foreign currency to prevent the shekel from appreciating too much against the dollar and harming the vital export sector, central bank chief Stanley Fischer said.
Exports, which account for more than 40 percent of Israel's economic activity, were more important than losing profits from buying and holding a weak dollar, Fischer said on Sunday at a news conference outlining Israeli issues ahead of next week's International Monetary Fund meeting.
"The Bank of Israel is not a bank of profits," he said. The central bank's main target is to contain inflation, encourage economic growth and employment while keeping financial stability, Fischer added.
Israeli media have criticised the two-year policy of buying foreign currency since holding dollars at current rates means losing money in shekel terms and requires the issuance of short-term bills to prevent a spike in money supply.
The shekel reached a near two-year peak versus the dollar at 3.6450 on Friday, despite an estimated purchase of up to $400 million of foreign currency by the central bank.
Fischer, a former first deputy managing director of the IMF, rejected the notion that the intervention has failed since the Israeli currency has appreciated from 3.85 per dollar in late July.
"There is no doubt that without intervention the shekel would be much stronger," Fischer told Reuters after the news conference. "But we are not China -- we are not going to buy $500 billion next year."
He stressed that the central bank had "no line in the sand" as to a specific exchange rate it was defending.
Israel was also not the only country intervening in the forex market, Fischer said, adding the issue was more the dollar's weakness than the shekel's strength. The euro has not depreciated as much as dollar-shekel, Fischer noted.
Part of the shekel's recent appreciation has been due to a series of interest rate increases, in which the Bank of Israel has raised its benchmark rate to 2 percent from 0.5 percent in August 2009. It increased its rate by a quarter-point last week.
Asked about future interest rate moves, Fischer said it depended upon which scenario emerges regarding global growth and rising housing prices. He suggested the bank would continue its policy of raising the key lending rate as long as the global economy maintains its growth forecast and Israeli inflation -- mainly housing costs -- remains a threat.
The rise in rates has come as housing prices have surged and pushed inflation expectations to nearly 3 percent in the coming 12 months -- the top of a government target of 1-3 percent.
Fischer said if housing prices, up some 20 percent in the past year, continue to rise the Bank of Israel would likely take additional steps but he declined to give details.
He said other crises around the world began with housing prices. "We will not allow this to happen in Israel," he added.
Economists expect the central bank to keep raising rates through 2011.
Israel's economy was in good shape and has almost emerged from the crisis, Fischer said. "But we are in a complicated global economy so we need to avoid becoming complacent," he said.
Growth in the United States and Europe looked to remain weak in the near term although Asia and other emerging markets were growing well. Fischer noted that Israeli exporters have done a good job in shifting some sales eastward to Asia.
Israel's economy is forecast to grow about 4 percent this year and 3.8 percent in 2011. (Editing by Jon Loades-Carter)