Israel's shekel slipped as much as 1.5% against the dollar and Tel Aviv stocks shed more than 1% on Monday, with investors becoming increasingly worried over a possible attack on Israel from Iran and Hezbollah.
The shekel stood at 3.77 per dollar by 1255 GMT, versus a rate of 3.72 on Friday but off an earlier intraday low of 3.78.
Israel shekel implied volatility gauges have risen sharply in recent days, with the three month measure hitting nearly 11%, its highest level since November, data from Fenics showed.
"We mostly remain elevated on Iran, with that also generating some of the volatility," said Mizrahi Tefahot Bank chief strategist Yonie Fanning, Reuters reported.
Since the beginning of August, the shekel has firmed 0.1% against the dollar but 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 roller coaster 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, UK, 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 Ali Khamenei to "harshly punish" Israel over the assassination on July 31 of the leader of Palestinian group Hamas in Tehran.
Israeli Defense Minister Yoav Gallant told US Defense Secretary Lloyd Austin on Sunday that Iran was making preparations for a large-scale military attack on Israel, according to a report.
"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 1.25% and 1.5%.
