Israeli financial markets are bracing for a period of turbulence while Prime Minister Ariel Sharon works on building a new coalition government, market experts have said.

One trader said he expected share prices to fall. Another said trading in the shekel was likely to be volatile.

A broad government... would strengthen the shekel, a narrow government... would weaken it Bank Leumi dealer

"It is all about what kind of coalition is formed," said Daniel Hass, a dealer at Bank Hapoalim.

One trader said it was too early to predict the make-up of the next government but some said investors' preferred scenario - a stable, broad-based coalition government - was now unlikely to emerge.

"The market will be volatile in coming days with the formation of the government and we will see changes in the dollar, depending on whether [Mr] Sharon can form a broad government, which would strengthen the shekel, or a narrow government, which would weaken it," a dealer at Bank Leumi said.

'Downward trend'

The Labour party has said it does not want to go into coalition with Mr Sharon's Likud party while the secular Shinui party - third-placed in the polls - has said it will not join a government that includes ultra-Orthodox parties.

"The market would like to see a government with Labour and Shinui," said Roy Laufer, a trader at Nessuah Zannex investment house.

Until it becomes clear which parties will form the next government, "we will continue to see little interest, little volumes and a downward trend" on the stock market, said a trader at Ofek Securities.

Any coalition without Labour or Shinui would be likely to be a narrow-based right-wing one, including ultra-nationalist and ultra-Orthodox parties, that investors would view as unstable.

"I assume the market wants stability," said Mr Hass.

Downplayed

Israeli shares and the shekel moved higher on Wednesday after Mr Sharon's election victory.

But the market moves were marginal and experts downplayed the significance of the rises.

The Tel Aviv Stock Exchange's blue-chip index closed 0.7% higher, just above the four-year low it touched on Monday.

The shekel inched up to 4.881 to the US dollar compared with 4.887 on Monday.

Israel's financial markets were closed on Tuesday for the election.