Israel's shekel headed for the biggest three-day selloff in two years as traders worried the killing of Hamas political leader Ismail Haniyeh on Iran's soil raised the danger of a broader Middle East war.

The currency fell as much as 1.2% to 3.7886 per US dollar after Hamas blamed Israel for the airstrike in Tehran. That took its three-day decline to 3.3%, the worst in the world only after the recently floated Ethiopian birr. Israel's 10-year sovereign yield rose 4 basis points to 4.97%.

In nearly 10 months of war between Israel and Hamas, investors had repeatedly hoped for a return to peace, leading to sporadic resilience in the shekel as well as the country's stock and bond markets.