Israeli markets rose on Wednesday on investor hopes that the outcome of the previous day's election means Benjamin Netanyahu will remain prime minister and ultra-Orthodox parties have no role in government.
The blue-chip Tel Aviv 25 index rose 1 percent to 1,204.65 points, near last week's year-high of 1,225.76, while the broader TA-100 index closed 0.9 percent higher.
Government bond prices gained as much as 0.5 percent and the shekel appreciated 0.4 percent to 3.722 per dollar from Monday's fixing of 3.738, near a 10-month peak.
"We will enjoy this for a few days," said Zach Herzog, head of foreign sales at the Psagot brokerage. "The downside will be if the coalition talks drag on or if we see Labour or (ultra-Orthodox) Shas in serious talks to get involved.
"This can be a launching pad for a positive 2013," he added.
Herzog said a coalition government more centrist than Netanyahu's current right-wing and religious administration would be better placed to impose needed budget cuts.
Ultra-Orthodox parties have traditionally demanded budget-draining state subsidies for their institutions in return for joining coalitions in Israel, where no one party has ever won a parliamentary majority on its own.
Results of Tuesday's parliamentary vote showed Netanyahu's right-wing Likud-Beitenu group emerging on top with 31 of parliament's 120 seats, albeit dropping sharply from the current 42 after voters shifted support to centrists focusing on Israelis' rising cost of living.
Yesh Atid, a new centrist party that has pledged to ease the burden of Israel's middle class, took 19 seats, one more than the number won by ultra-Orthodox parties.
If Yesh Atid's leader, former TV news anchor Yair Lapid, opts to join a Netanyahu coalition, along with the far-right Jewish Home party, the prime minister would likely control 61 seats, giving him a narrow parliamentary majority.
Netanyahu, however, has said he hopes to form as broad a government as possible, signaling the way was open for ultra-Orthodox factions to participate.
Netanyahu's reputations as a skilled economic operator was harmed just before the election when data showed Israel posted a budget deficit of 4.2 percent of gross domestic product in 2012 - more than double its initial target.
To meet a target of 3 percent in 2013, the government - which overspent heavily the past two years to keep its previous coalition partners happy - will have to find some 15 billion shekels ($4 billion) of cuts, as well as raising taxes.
Credit agency Fitch forecast the deficit reaching 3.8 percent of GDP this year, saying the stable outlook on its 'A' rating risked being downgraded in the event of "serious fiscal slippage".
But a move towards the government's 60 percent debt-to-GDP target could result in positive ratings action, its sovereign ratings director Paul Gamble said in a report on Wednesday.
He also said the coalition talks would focus on budgetary issues and likely be time-consuming.
Psagot's Herzog said the market was also pleased that the centre-left Labour Party, whose leader, Shelly Yachimovich, has railed against capitalism during the election campaign, received just 15 seats, a poor than expected showing.
"In addition to the positive result that Netanyahu was re-elected as prime minister, you have a significant blow to the prestige to the anti-business candidate," Herzog said.
A currency dealer at a large Israeli bank said most of Wednesday's dollar selling came from local rather than offshore customers. He said there was still a way for the dollar to fall before its next support level at 3.7050 shekels.
According to financial information services firm Markit, Israeli five-year credit default swaps - which insure against debt default - edged up 125 basis points from 123 on Monday. They had been at 156 basis points in November when military tensions escalated in the Gaza Strip.
Additional reporting by Tova Cohen and Carolyn Cohn; Editing by Jeffrey Heller, John Stonestreet