Israel's shekel slid more than one per cent to a two-month low against the dollar on Wednesday after Israel killed the military commander of militant group Hamas in an airstrike that investors fear could trigger a new wave of violence.

"It caught the market sleeping," said Dan Biro, a dealer at Israel Discount Bank, of Israel's action which came in response to more than 100 missiles fired out of the Gaza strip the past few days. "It's a very big kill."

Islamist Hamas said Ahmed Al-Jaabari, who ran the organisation's armed wing, Izz el-Deen Al-Qassam, died along with a passenger after their car was targeted by an Israeli missile. Israel warned of more strikes while Hamas and other militant groups have vowed a strong response.

Israel's Shin Bet domestic intelligence service confirmed it had carried out the attack, saying it had killed Jaabari because of his "decade-long terrorist activity".

Israeli markets typically shrug off Israeli-Palestinian violence, but dealers said investors fear Hamas may have longer-range missiles than in the past that could wreak havoc on Israel's south.

Biro said the market had expected some sort of Israeli reprisal for its rocket barrage but "not this massive".

Trading had been quiet for most of the session, with the shekel fixed at 3.918 - a 0.3 per cent appreciation from Tuesday. But around 4 pm local time (1400 GMT), Israel's military started launching a series of missiles strikes across Gaza, killing nine Palestinians and sparking a dollar-buying frenzy from locals and foreigners.

The dollar stood at 3.9625 at 16:21 GMT.

"There is no resistance at all," Biro said, adding that dollar buying included spot, options and forwards. "We weren't seeing a lot of buyers until" the Gaza strike.

The violence also sent key stock indices down between 0.5 and 0.9 per cent. Government bond prices fell as much as 0.5 per cent.

Since the beginning of the month, the shekel had stuck to a narrow range of 3.87-3.92 to the dollar. It had appreciated from 4.04 in late August to 3.80 by mid-October, partly prompting a surprise Bank of Israel rate cut on Oct. 26 to 2 per cent from 2.25 per cent.

The central bank is opposed to a strong shekel since it harms exports, which account for more than 40 per cent of Israel's economic activity.

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