*

Shekel strengthens 4.5% against dollar, biggest daily gain

since

2008

*

Tel Aviv 125 index rises 1.9% as war with Iran escalates

*

Israel's bonds and credit default swaps gain, but recent

losses

remain

*

Some investors see favourable post-conflict landscape for

Israeli assets

(Adds details, comments throughout)

By Steven Scheer and Karin Strohecker

JERUSALEM/LONDON, June 16 (Reuters) - Israel's shekel

jumped sharply and stocks and bonds gained on Monday as

investors began to shape a more favourable risk assessment for

country's assets in the face of an escalating conflict with

Iran.

The shekel strengthened more than 4.5% against the

dollar in its biggest daily gain since at least 2008, snapping a

four day losing streak and clawing back hefty losses suffered

last week since rumours of an Israeli attack on Iran

intensified. Israel launched its operation early on Friday.

The main Israeli share indices also gained, with the broad

Tel Aviv 125 index up 1.9% in afternoon trade,

extending Sunday's gains of some 0.5% following a weekend of

punishing Israeli attacks on Iranian nuclear facilities,

ballistic missile factories and military commanders that were

met with Iranian strikes against Israel.

"The reaction of the local markets ... perhaps reflects the

assessment that in certain scenarios this war may be a catalyst

for a new status quo in the region," said Bank Hapoalim Chief

Economist Victor Bahar.

Israeli officials have said the conflict will take time and

won't end until the Iranian nuclear threat is removed after

launching its biggest-ever military strike against its

longstanding enemy on Friday. Tehran denies it wants to build

nuclear weapons.

But tensions in the region have been on the rise since the war

in Gaza erupted 20 months ago after Hamas-led and Iranian backed

militants stormed into southern Israel. Fighting with Tehran's

proxies such as Hezbollah in Lebanon and the Houthis in Yemen

has intensified.

"Most of these (proxies) have been destroyed or weakened,

but Iran's nuclear weapon program has remained a long-term

existential threat for Israel," said Leader Capital Markets

Chief Economist Jonathan Katz.

"Delaying this program significantly - and maybe a credible

commitment from Iran to forgo high level nuclear enrichment -

will reduce Israel's geopolitical risk premium markedly."

Israel's international bonds as well as its credit default

swaps - a proxy for insurance against risk of default - also saw

gains on Monday but have yet to offset recent losses.

The 2120 maturity added more than 1.3 cents to bid at 66.88

cents on the dollar, Tradeweb data showed - still more than 1

cents below levels seen last Wednesday when reports of a

potential imminent attack emerged.

Israel's economic performance and the macroeconomic

pressures it faces have been choppy in recent years.

Data on Sunday showed the inflation rate eased more than

expected to 3.1%. Though the central bank is expected to remain

cautious and hold interest rates - possibly until early 2026.

Derivatives market is now pricing in a rate cut in mid-2026.

Earlier on Monday, first-quarter economic growth was revised

up to an annualised 3.7% from 3.4%.