UPDATE 3-Tel Aviv shares gain after sharp sell-off

* TA-25 index up 0.8 percent in midday trade

* Index lost 7 pct on Sunday after U.S. credit rating downgrade

* Barclays: Israel not very vulnerable to U.S. downgrade

* Israeli mutual funds hit by heavy redemptions on Sunday (Adds closing prices, finance minister comments)

By Tova Cohen

TEL AVIV, Aug 8 (Reuters) - Tel Aviv shares bounced back on Monday to recoup some of their 7 percent losses the previous day in what was one of the first responses to the downgrade in the United States' credit rating.

The Tel Aviv 25 blue chip share index closed up 1.5 percent at 1,090.39 points.

Joseph Wolf, head of research at Barclays in Israel, said there were economic concerns given Israel's links to global markets and the fact that exports account for 40-50 percent of gross domestic product.

"However, growth in Israel has been strong year-to-date ... and the bias until now has been a rising rate environment. Economic fundamentals have been on an improving trend for quite a while," Wolf said.

The fiscal deficit and government debt ratio are falling and the central bank's foreign currency reserves are rising.

"Therefore, Israel is not very vulnerable to the U.S. downgrade," Wolf said.

Referring to an expected growth rate of 4.8 percent this year and a jobless rate at a more than two-decade low of 5.7 percent, Israeli Finance Minister Yuval Steinitz said the country's economy is in a relatively good position and there was no need for panic following steep stock declines.

"We have our hand on the pulse and are watching what is happening in the markets," Steinitz told reporters. "But together with that, we know that the fundamental data of the Israeli economy during the shock to the global markets are good, as opposed to most Western countries."

The Israeli market, along with a few other markets in the Middle East, were the first to trade after S&P late on Friday cut the U.S. long-term credit rating due to concerns about the country's budget and climbing debt burden.

The Tel Aviv market opening was delayed on Sunday by nearly an hour as circuit breakers kicked in when shares fell more than 5 percent in pre-market trade. The last time circuit breakers were used was on Sept. 21, 2008, after the collapse of Lehman Brothers.

The Meitav brokerage said investors redeemed 1.4 billion shekels ($395 million) from mutual funds on Sunday, the highest daily level since the Lehman Brothers collapse. The largest amount -- 900 million shekels - was redeemed from funds specialising in corporate bonds.

The index of Israel's top 20 corporate bonds slipped another 0.2 percent after losing 2.1 percent on Sunday.

Since March nearly 18 billion shekels have been redeemed from Israeli mutual funds, Meitav said.

Wolf said one possible concern might be the impact of the "tent" protests in Tel Aviv and other cities.

These mass demonstrations for lower living costs over the last several weeks culminated in a march of a quarter-million people on Saturday night in the biggest economy-related protest in Israel's history.

Wolf said this could cause a move towards more populist policies and lead to a worsening in economic policies.

"Yet, it is also true that Israel remains a safe haven of sorts," Wolf said. "Its 'A' rating is solid, in our view, and should not be directly in jeopardy, despite the lower rating for the U.S."

($1 = 3.54 shekels) (Additional reporting by Ari Rabinovitch. Editing by David Cowell)