UPDATE 1-Shekel gains vs dollar on relief Israel has not struck back at Iran

(Adds details, stock/bond moves, analyst comment)

By Steven Scheer

JERUSALEM, April 15 (Reuters) - Israel's shekel rose 1% against the dollar on Monday as it became clear that Israel has so far complied with requests by allies not to hit back at Iran after Saturday's attack.

In what market players said was a "relief rally", the shekel stood at 3.73 per dollar, from Friday's close of 3.771. It was the market's first reaction to the strike by more than 300 missiles and drones from Iran as the local foreign exchange market does not trade on Sundays.

Despite Monday's move, the shekel was still nearly 2% weaker against the dollar this month and 4% lower so far in 2024.

The shekel fell last week on fears that an Iranian attack was imminent after a suspected Israeli airstrike on Iran's embassy compound in Syria on April 1.

Tel Aviv stock indices gained 0.3% on Sunday. Shares rose early in the session on Monday but turned lower late in the day. Government bond prices fell as much as 0.6%.

Investors believe "that the whole episode against Iran will not escalate out of control," said Jonathan Katz, chief economist at Leader Capital Markets.

He noted that markets are relieved that Israel received international support in the wake of the Iran attack, while U.S. President Joe Biden and other allies have told Israel not to retaliate. He also said that military decisions in Israel were being made by Prime Minister Benjamin Netanyahu and his narrow war cabinet and not by far right wing lawmakers in his coalition.

"Markets are encouraged that will not escalate significantly and even if Israel does some retaliation hopefully it'll be limited and under the auspices of the U.S. so all that's generally positive for the shekel," Katz said.

(Reporting by Steven Scheer, Editing by William Maclean)