Wider unrest involving Palestinian citizens of Israel in the latest escalation of violence could dampen the country's economic performance, according to Fitch Ratings.
The unprecedented uprising of Palestinian citizens of Israel, who account for 21 per cent of the country's population, poses risks to the economy, the agency said.
"If broader parts of this group become actively engaged in a sustained conflict, then this would have significant economic repercussions," Fitch Ratings said.
It also poses a stumbling block to the formation of a new coalition government, which would rely on at least some form of tacit support from parties representing Palestinian citizens.
On Thursday, a number of airlines have diverted flights amid the growing hostilities. American Airlines, United Airlines, Delta Air Lines, Lufthansa and British Airways all temporarily suspended flights to Tel Aviv.
Tourism earnings and employment, which could have witnessed an uptick from a planned reopening to foreign visitors, may be affected by the violence, the ratings agency said.
However, potential disruptions to Israel’s gas exports would only have a marginal impact on its current-account surplus, it added.
In January, the ratings warned "the materialisation of political and security risks that would have a serious and prolonged impact on the economy and public finances could be a driver for negative rating action, and the latest violence could pose some threats to the outlook".
"The violence will set back any prospect of a longer-term reduction of the security and external risks that weigh on Israel’s rating."
Israel has a A+ sovereign credit rating from Fitch with a stable outlook.
Israel and Hamas have been engaged in a deepening conflict, which has killed at least 83 Palestinians in Gaza, including 17 children, as of Thursday. Seven Israelis, including a soldier, two children and one Indian national have also died.
Sparked by heavy-handed Israeli policing during Ramadan and the escalation of a years-long bid by Jewish settlers to take over Arab homes in occupied East Jerusalem, armed groups in Gaza launched more than 1,000 rockets towards Israel, while more than 150 Israeli air strikes hit the strip, leading to one of the most intense cross-border conflicts in years.
The conflict worsened when Israeli police stormed the compound of Al Aqsa Mosque – the third-holiest site in Islam – saying they were responding to rock-throwing protesters ahead of Jerusalem Day marches by ultranationalist Israeli Jews.
While the latest violence will impact the economy it is "unlikely to derail the broader recovery that is underway in the wake of the country's successful vaccination programme against the Covid-19 pandemic", the ratings agency said. Israel has the highest vaccination rate of any country - other than small islands such as the Maldives or Seychelles. It has administered more than 10.5 million vaccines, or enough for 58.1 per cent of its population, according to Bloomberg's Vaccine Tracker.