JERUSALEM, Aug 12 (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%.