The Tel Aviv Stock Exchange closed the first day of the trading week with gains, thanks to a last-minute rally - after the blue-chip Tel Aviv-25 Index sank as low as 4% during the course of trading.

International markets and local defense issues weighed heavily on stocks as trading began. Wall Street finished its worst week in two and a half years on Friday, and global markets didn't do much better, as investors feared the global economy was heading into a double-dip recession. Meanwhile, Israel's southern front heated up with terror attacks and rocket fire.

These factors established the direction as the TASE opened yesterday morning. Indeed, in keeping with expectations, stocks sank like a rock.

But the indexes reversed direction in the last half hour of trading: Institutional investors including pension funds and provident funds apparently thought the prices were attractive for long-term investments. Ultimately, the TASE closed the day on a surprisingly green note.

The TA-25 closed at 1,079 points, up 1.3%, after losing as much as 4% during trading.

The broader Tel Aviv-100 Index closed at 968 points, with gains of 0.7%, after losses of 3.3% during yesterday's session. The Banks-5 Index also closed with gains of 1.8%, after falling 4.5%.

However, not all indexes closed in the green thanks to the last-minute rally: The Biomed Index was off 1.4% and the Tel Bond-20 lost 1%, which is substantial for bonds.

Turnover was NIS 1.6 billion, which was particularly heavy for a Sunday in August.

Mutual funds sold off about NIS 350 million to NIS 400 million in assets yesterday, much less than on last Sunday, after Standard & Poor's announced it had lowered the United States' sovereign debt rating. That day, the funds sold off NIS 1.4 billion in assets.

However, August is on track to be the industry's worst month in terms of sell-offs, with more than NIS 6.2 billion sold. This would top the current record of NIS 6.1 billion, which was set in June.

In addition, the financial markets are lowering their expectations for inflation over the next 12 months. Bond prices indicate that the market thinks inflation will be only 2.6% over the next year, which is within the government's price-stability range of 1% to 3%. As of July, the market was putting inflation at 3%.

Inflation expectations are calculated based on the difference between the prices of inflation-linked, long-term government bonds and those of unlinked government bonds.

Banks and economic-consulting companies more or less agree with market expectations, and are putting inflation at 2.5% for the next 12 months.

This comes after July's low inflation rate surprised analysts. The social protest movement has had a hand in this, as consumers cut their purchases and prices fell. The global slowdown also is playing a role.

The protest also reduced the public's money supply (cash and money in checking accounts ) by 1.7%, to NIS 116.8 billion. As a point of comparison, the money supply increased by a low 4.6% in 2010, but jumped 52.3% in 2009 after the central bank lowered interest rates to nearly zero.

Money supply is considered an important economic indicator, and it helps push demand.

On to local shares: Notable stocks yesterday included Modiin Energy, which gained 5.8% after losing 8.8%, Avner Oil Exploration, which gained 4.5% after losing 3.4%, and Allot Communications, which dropped 17.3%.

Meanwhile, Suny Electronics, Ilan Ben-Dov's holding company, announced that it is in a NIS 34 million working-capital deficit. This figure, which comes from the company's annual reports and is current as of the second quarter, relates only to Suny, not its holdings. Suny controls Partner Communications through subsidiary Scailex. Scailex lost 1.5% yesterday, while Partner gained 2%.

Credit-rating company Midroog lowered the credit rating of Elbit Imaging and its subsidiary Plaza Centers N.V. by one notch, to A3. Elbit's shares gained 0.3%, while Plaza gained 4.1%.

Hadera Paper, a member of the IDB group, reported a heavy loss for the second quarter: NIS 35 million. It earned NIS 17 million in the parallel quarter of 2010. Hadera's share price lost 5% yesterday, while the IDB group lost 2%.

Dror Reich contributed to this report.