JERUSALEM (Reuters) - Israel's shekel slipped as much as 1.7% against the dollar on Monday and Tel Aviv stocks shed more than 1% with investors becoming increasingly worried over a possible attack on Israel from Iran and Hezbollah.
The shekel slumped to 3.7860 per dollar by 1556 GMT, a decline that saw the currency suffer its worst daily drop since Oct. 9, when it dropped more than 2.5% in the wake of the Hamas attack on Israel on Oct. 7. The shekel had closed at 3.72 on Friday.
"We mostly remain elevated on Iran, with that also generating some of the volatility," said Mizrahi Tefahot Bank chief strategist Yonie Fanning.
Israel shekel implied volatility gauges have risen sharply in recent days, with the three month measure hitting 11%, its highest level since November, data from Fenics showed.
Monday's decline in the shekel nearly wiped out all of last week's 2% gains. The currency has weakened 5% over the past 12 months. Emerging market currencies have struggled more widely this year against a broadly stronger dollar.
"The shekel is struggling to hold on to last week's gains amid rising market concerns that an attack by Iran on Israel could be imminent, based on comments from various officials from both sides," said Piotr Matys, senior FX analyst at InTouch Capital Markets.
Israel's currency has been on a rollercoaster ride since the start of the month.
It had weakened to 3.85 per dollar on Aug. 6 following concerns that Iran and its proxy Hezbollah in Lebanon would retaliate for Israel killing senior Hezbollah and Hamas officials, but the shekel moved back to 3.72 last week on efforts by the United States, Britain, France and Germany to prevent attacks.
On Friday, an Iranian Revolutionary Guards deputy commander was quoted as saying by local news agencies that Iran was set to carry out an order by Supreme Leader Ayatollah Ali Khamenei to "harshly punish" Israel over the assassination on July 31 of the leader of Palestinian militant group Hamas in Tehran.
Israeli Defence Minister Yoav Gallant told U.S. Defense Secretary Lloyd Austin on Sunday that Iran was making preparations for a large-scale military attack on Israel, according to an Axios reporter, citing a source with knowledge of the call.
"Expectations of a ceasefire are low and declining and the spectre of an Iranian retaliation remains," said Hasnain Malik, head of equity research at Tellimer.
Tel Aviv share indices were down between 1.3% and 1.5%.