UPDATE 1-Israel bonds, shekel jump on Fed's Treasuries plan

(Adds trader comments, closing prices)

By Steven Scheer

JERUSALEM, March 19 (Reuters) - Israeli government bonds and the shekel ILS= soared on Thursday after the Federal Reserve said it would buy U.S. Treasury bonds to boost the U.S. economy.

Israel's benchmark 10-year bond ILGOI0219=TA closed up 1.1 percent to yield 4.62 percent, off midday peaks of 1.6 percent and a yield of 4.55 percent. Its yield had topped 4.8 percent earlier in the week.

"We have a direct affect between U.S. Treasuries and Israeli government bonds," said a trader at the IBI Investment House in Tel Aviv. "If the yield goes down in Treasuries, we expect the same trend in Israel."

He noted that it was important to keep pace with the yield differential, which stands at 211 basis points.

The trader said a wave of selling hit the market in the afternoon following rises in the morning.

In the foreign currency market, the shekel gained about 1.8 percent against the dollar, with its official rate set at 4.05, compared with Wednesday's official rate of 4.1240. Following the setting the official rate, the shekel advanced further to 4.0 -- its strongest level since early February.

With Israeli interest rates falling and the dollar gaining globally, the shekel had shed more than 20 percent, reaching 4.25 per dollar earlier in March, from hitting a multi-year peak of 3.20 last July.

The U.S. currency on Wednesday posted its biggest one-day slide since 1995, hitting a two-month low against the euro. It extended its losses on Thursday.

The Fed said on Wednesday it would pump an additional $1 trillion into the U.S. economy, including buying up to $300 billion of longer-term Treasuries. That pushed the 10-year U.S. Treasury yield down about 50 basis points to its largest one-day fall since 1987.

It also caused Israel to delay a long-awaited dollar-denominated bond issue.

Israel on Wednesday was set to sell $1.5 billion of global bonds at 262.5 basis points over comparable U.S. Treasuries. Finance Ministry officials said demand for the offering had reached $12 billion, with 60 percent from foreign investors.

Citigroup, who along with Goldman Sachs and Deutsche Bank are lead managers of the deal, said on Wednesday Israel's bond would price later on Thursday.

A month ago, the Bank of Israel started buying Israeli government bonds to lower longer-term interest rates that more impact consumers and businesses. Short-term rates stand at 0.75 percent after rate cuts of 3.5 points since October.

The 10-year bond yield had dropped 50 basis points to 4.38 percent at the time but the gain in the bond market was erased until Thursday.

Traders said the early morning bounce was helped by Bank of Israel bond purchases, which are believed to be 40 million to 100 million shekels a day.

Tel Aviv share indexes rose, with the blue-chip Tel Aviv 25 index .TA25 up 0.3 percent and the broader TA-100 .TA100 closing 0.4 percent higher. Financial and real estate stocks led the market.

The index of 20 largest corporate bonds rose 0.9 percent.