With worries about a U.S. attack on Syria fading into the background, Tel Aviv shares marked a second day of sharp gains in heavy trading Tuesday that brought the benchmark TA-25 index close to the 1,200 mark again. The dollar weakened.

Investors on the Tel Aviv Stock Exchange and around the world were cheered by news that Syria accepted a Russian proposal Tuesday to give up chemical weapons and win a reprieve from U.S. military strikes. Encouraging economic data in China showed stronger-than-expected industrial output while retail sales grew at the fastest pace this year, reinforcing signs that the world's second-largest economy was stabilizing after slowing for more than two years.

The TA-25 of blue chips rose 1.6% by close yesterday to 1,095.89 points, extending its 1.2% rise the day before as some NIS 1.63 billion in shares changed hands. The TA-100 was up 1.4% to 1,095.89. No sector escaped the rally, but bank and telecommunications shares paced the gains, with the TA-Communications shares up 1.9% at 695.69 and the TA-Banking index ahead 2.1%, up 1.133.73 by the finish.

Energy shares were boosted by news that the partners controlling the Tamar Southwest license were moving ahead with plans to conduct exploratory drilling, spending $122 million over four months. Ratio jumped 5.2%, Isramco 4.4% and Delek Group 3.8%.

In the fixed-income market, government bonds rose again on encouraging budget data from the treasury released Sunday, showing tax collections are running ahead of projections, spending is lower than expected and the deficit narrowing in the first eight months of the year. The government's 10-year Shahar bond rose 0.24%, cutting the yield to 4.032%. Its inflation-indexed Galil bond for the same term added 0.1%, trimming its yield to 1.9%.

On the corporate side, the Tel Bond 20, 40 and 60 indices rose as much as 0.34%.

The Dow Jones industrial average was up 0.7% in early afternoon New York time at 15,160.83. The Standard & Poor's 500 Index was ahead 0.6% at 1,681.46 and the Nasdaq Composite Index up 0.5% at 3,723.83. European shares rallied to a 3-1/2 month high as the pan-European FTSEurofirst 300 index closed 1.3% higher at 1,243.60 points, a level last seen on May 29 and just above its high on August 14.

In foreign currency trading, the dollar took a tumble, with the Bank of Israel rate set at NIS 3.6050, a 0.6% drop from Monday. The euro also shed value, but by a more modest 0.2% to NIS 4.7738.

"The dollar-shekel exchange rate has dropped sharply since the start of the week, losing some 4.5 agorot," said a currency trader. "While the dollar is weak globally, its collapse against the shekel is unusual. This should be due to the Syria effect, which has created a lot of forex volatility locally in the last weeks."

The trader said he see the next support level for the dollar at NIS 3.585 but a resistance level of NIS 3.62 over the next several days. It warned that the central bank might intervene, as it did last week.

In TASE trading, Israel Chemicals extended a powerful rally for a second day, climbing 4.4% on turnover of NIS 156 million, making it by far the most active share of the day, sparking market speculation that a resolution might be in sight for a dispute with Russia that split the Belarus potash consortium, a development that could herald higher potash prices.

Other big gainers include Nochi Danker's holding company Discount Investment Corporation, which jumped 7.8% and its Koor unit, which added 2.8%. Koor bondholders late on Monday approved a plan by the company to redeem the debt early. The move that will help clear the way to merge Koor into its parent company Discount and improve their latter's balance sheet.

Reuters contributed to this report.