"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 rockets fired out of the Gaza Strip the past few days. "It's a very big kill."
Hamas said Ahmed al-Jaabari, who ran the organization's armed wing, Izz al-Din 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 groups have vowed a strong response.
Israel's Shin Bet domestic intelligence service confirmed it had carried out the attack, saying it had killed al-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 percent appreciation from Tuesday. But around 4 p.m. local time, 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 4:21 p.m.
"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 percent. Government bond prices fell as much as 0.5 percent.
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 percent from 2.25 percent.
The central bank is opposed to a strong shekel since it harms exports, which account for more than 40 percent of Israel's economic activity.
JERUSALEM (Reuters) -- Israel's shekel slid more than one percent 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.