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Tel Aviv stocks dropped hard as share prices retreated worldwide following Greece's dramatic downgrade to the lowest credit rating of any graded country. Oil prices also dropped as global concern spiked anew. Among the hardest-hit Israeli shares yesterday were bank stocks as Moody's growled about possibly downgrading France's three top banks.

Israeli indexes were red across the board. The benchmark TA-25 index fell 2.7% to 1,190 points, and the broader TA-100 index dropped 2.3% to 1,086 points. Total turnover was average to heavy at NIS 1.8 billion.

The TA-Com index of communications companies fell 2.5%, but the worst-hit index was the TA-Oil and Gas, which dropped 4.3%, weighed down by losses of more than 5% in Delek Group companies Avner Oil Exploration and Delek Drilling, a 7% tumble by Givot Olam Oil Exploration, and a 6.2% retreat by Isramco. Gulliver units soared 15.3% against the trend and Naphtha Exploration gained almost 1%.

In Europe, the screens were relentlessly red, though the losses there were milder. The Madrid General Index fell 1.9%, and the Paris CAC-40 index lost 1.4%, but most of the European indexes lost something under 1%. Traders ascribed the pullback in Europe to data showing that U.S. inflation is higher than had been expected.

In Tel Aviv, stocks were hovering slightly below the flatline until mid-afternoon, when investors heard that credit rating agency Moody's is mulling a downgrade of France's top three banks - BNP Paribas, Societe Generale and Credit Agricole - because of exposure to Greece's debt-stricken economy. The benchmark TA-25 index promptly took a hard dive and kept falling until the session's end.

"We are not worried," French government spokesman Francois Baroin told reporters. "French banks are among the best-rated currently and the most solid of the big international banks," he added.

Laurent Wauquiez, French Secretary of State for European Affairs, noted that Germany's banks are exposed to Greece more than France's are. French banks are second to Germany in exposure to Greek debt, but they have the highest overall bank exposure to the Greek economy, according to the Bank for International Settlements.

Asian markets were mixed, with no clear trend in any given market.

Back in the Holy Land, Yaniv Pagot, top strategist at the Ayalon investments firm, suggested that the cloud over the European banking sector caused by the debt crisis in Europe will upset the markets in the near term.

Pagot also suggests that the general Israeli public is getting cold feet: Short positions betting against the market have grown, and mutual funds investing in financial assets have been reporting redemptions.

Bank shares took a hammering. Bank Leumi shares fell 3.75% on turnover of NIS 88 million, Hapoalim lost 4.2% on turnover of NIS 103 million, and Mizrahi-Tefahot lost 2% while shares of Discount Bank lost 5.6%. The Bronfman family, which owns the controlling interest in Discount Bank together with the Schron group, said yesterday that they are not - contrary to reports - maneuvering to sell the controlling interest in the bank. The Bronfman group said it had received permission in principle, at the time of purchase, to sell the controlling interest in Discount after five years of buying it, "and nothing since then has changed."