* Israeli currency inches up after Wednesday's slide
* Shares, bonds extend Wednesday's declines
* Traders blame global weakness as well as Gaza clashes
* Market thinks clashes won't escalate into war, say traders
* Say ground forces' incursion into Gaza would hit prices
By Steven Scheer
JERUSALEM, Nov 15 Israeli shares and bonds extended losses on Thursday, while the shekel rose off lows as violence between Israel and Palestinian militants intensified, though investors doubted the clashes would lead to a full-fledged war.
The shekel slid more than 1 percent late on Wednesday to a two-month low against the dollar after Israel killed the military commander of Hamas in an airstrike on the Gaza Strip.
Israel said the strike that killed Ahmed Al-Jaabari, who ran the militant group's armed wing, came in response to more than 100 missiles fired out of Gaza this week.
On Thursday, Israeli warplanes bombed targets in and around Gaza city with the Palestinian death toll rising to 13, while a Hamas rocket killed three Israelis in the town of Kiryat Malachi, 25 km (15 miles) north of Gaza.
The shekel inched up to 3.95 per dollar.
"People don't think the situation will escalate (into a war). It won't have an effect on the economy," Rony Gitlin, head of spot trading at Bank Leumi, said.
The currency slid to 3.96 late Wednesday and close to 3.98 early on Thursday, having been fixed at 3.9180 on Wednesday before the airstrike.
Gitlin said some who did not get to buy dollars on Wednesday - when the strike caught the market off guard - bought this morning. But then dollar sellers emerged.
"Today we see offshore banks and local customers enjoying the high rate of dollar-shekel," he said.
Tel Aviv shares saw gains of 0.5 percent evaporate into a loss of around 1 percent on the killing of Al-Jaabari on Wednesday.
The Tel Aviv 100 index fell a further 0.9 percent in Thursday afternoon trading, with traders attributing most of the declines to weakness on global markets.
"Investors have a lot of experience with these flare-ups of violence," said Clal Finances's Saar Golan.
He said investors do not believe company earnings or the economy will be impacted as most of the country goes on with its daily business.
"The market assumes this is a flare-up and not a major geopolitical change," he said. "If it follows the pattern of past operations, you will have tit-for-tat violence followed by some brokered ceasefire and a return to normality."
Golan assumes that of the nearly 2.5 percent decline in the market since the airstrikes began, about 1 percent was related to the violence.
But should Hamas fire missiles at Tel Aviv and Israel send ground troops into Gaza, then prices could fall "a few more percent," Golan said.
Tel Aviv share indexes are up 7-9 percent so far in 2012 after declines of up to 20 percent in 2011.
The shekel has depreciated by 3 percent versus the dollar this year. Since the beginning of the month, it had stuck to a narrow range of 3.87-3.92 to the dollar.
Government bond prices fell as much as 0.6 percent after falling up to 0.6 percent on Wednesday.
Israeli five-year credit default swaps slipped 3 percent to 156 basis points. They have risen more than 9 percent this week and had been as low as 137 basis points in September.