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Tel Aviv stocks retreated half a percent yesterday after losing their morning gains. In the absence of foreign investors, who are taking a long weekend including Labor Day in the United States today, trading was volatile.

It is also possible that 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 problem with the defense budget was not financial but bad management - soured the mood.

Whatever the impetus, the TA-25 index ended 0.5 percent 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 percent. Turnover was very thin at NIS 550 million.

In the bond market, long-term government Shahars and Galils dropped by 0.1 percent to 0.3 percent respectively.

Second-quarter profits ran high in the second quarter of 2006. The 25 companies on the TA-25 index presented a 38 percent 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.

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

Hapoalim (TASE: POLI) and Leumi (TASE: LUMI), the two biggest banks in Israel, retreated by 0.4 percent, after starting with gains. Discount Bank lost (TASE: DSCT) 0.4 percent and Mizrahi-Tefahot (TASE: MZTF) fell by 0.3 percent.

The story of the day was FMS Migun Enterprises (TASE: FMS), which makes protective gear for defense forces - armoring, bulletproof 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 U.S. Army was dissatisfied with ballistic clothing samples that FMS had provided sent its stock into freefall yesterday.

The share finished 27.5 percent lower on tremendous turnover of NIS 106 million, the highest of the day and a fifth of the total volume.

Lipman Electronic Engineering (TASE: LPMA) jumped by 10.9 percent on turnover of NIS 7.3 million after starting on a wide arbitrage gap.