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Tel Aviv stocks retreated half a percent on Sunday after losing morning gains. In the absence of foreign investors taking a long vacation including Labor Day on Monday, trading was volatile. Possibly remarks by ministers as the budget talks fired up, such as Roni Bar-On's comment that all Israelis should accept a drop in their standard of living, and Meir Sheetrit's contribution that the defense budget problem wasn't financial but one of bad management, soured the mood.

Whatever the impetus, the TA-25 index ended 0.5% lower at 799.9 points, the TA-100 index lost the same to 816.2 points and the Tel-Tech 15 index surged ahead by 0.9%. Turnover was thin at NIS 550 million. In the bond market, long-term government Shahars and Galils dropped by 0.1% to 0.3% respectively.

Second-quarter profits ran high in the second quarter of 2006. The 25 companies on the TA-25 index presented a 38% leap in profit year over year to a combined NIS 7.2 billion. But much of that profit was due to one-time gains at the banks, mostly from selling provident and mutual funds.

But cheer from that news is dampened by the threat of the deficit. Prime Minister Ehud Olmert and Finance Minister Avraham Hirchson said that government spending would be increasing by NIS 7.3 billion next year, which is double the original target. That would increase the deficit from 2% of GDP to 2.8%.

In anticipation, HSBC downgraded banks Leumi and Hapoalim, and cut their price targets. Bank stocks retreated on Sunday: the banks index lost 0.4%. From the start of the year, the banks index has lost 7%.

Banks Hapoalim and Leumi, the two biggest in Israel, retreated by 0.4%, after starting with gains. Bank Discount lost 0.4% and Mizrahi-Tefahot fell by 0.3%.

The story of the day was FMS Migun Enterprises, which makes shielding for defense forces - armoring, bullet-proof vests and so on. The company delivered two unfortunate announcements after the bell on Thursday: poor results for the second quarter of 2006 and news that the American army was dissatisfied with ballistic clothing samples that FMS had provided sent its stock into free-fall on Sunday. The share finished 27.5% lower on tremendous turnover of NIS 106 million, the highest of the day and a fifth of the total volume of trade. Earlier in the year FMS had commanded turnover of around NIS 3 million a day.

FMS also admitted that second-quarter profits tumbled to only NIS 9 million, a drop of 20% year over year. First-half sales were down 57% year over year to NIS 157 million, and its net profit shrank by half to NIS 31 million.

Electronic payment systems maker Lipman Electronic Engineering jumped by 10.9% on turnover of NIS 7.3 million after starting on a wide arbitrage gap. Its leap on Wall Street had been fueled by a strong report from Verifone, which is buying Lipman.

Generic drugs giant Teva gained 0.9% on low volume of NIS 28 million.

WorldGroup, a holding company, attracted attention thanks to a giant transaction that should generate it NIS 70 million in capital gains. A subsidiary is selling sold its 75% holdings in Insureworx for NIS 152 million and to post a pretax profit of NIS 68 million to NIS 72 million. WorldGroup had bought Insureworx three years before for NIS 35 million. Shares in WorldGroup gained 4.3% on low turnover of NIS 0.2 million.

Real estate shares did not escape the negative trend. Eliezer Fishman's Jerusalem Economic Corporation sank by 1.7% and Gazit Globe lost 2.1%. Africa Israel ended the day 0.9% lower, presumably not because of the news that Bank Leumi CEO Galia Maor's son Ron Maor is joining the top management of the vast real estate company.