By Steven Scheer

JERUSALEM Moody's Investors Service said on Tuesday that passage of a new law in Israel limiting some Supreme Court powers signalled that political tensions will continue and likely have negative consequences for Israel's s economy and security situation.

"We believe the wide-ranging nature of the government's

proposals could materially weaken the judiciary's independence and disrupt effective checks and balances between the various branches of government, which are important aspects of

strong institutions," Moody's said in a report.

The agency did not take any ratings action on Israel. In April, Moody's downgraded Israel's outlook to stable from positive but affirmed Israel's sovereign credit rating at "A1"

Israeli doctors declared a strike and black ads covered newspaper front pages on Tuesday in a backlash over the hard-right government's ratification on Monday of the first part of a judicial overhaul that critics say endangers democracy.

Since the plan was announced in January, mass protests have taken place across Israel while foreign investors have been spooked, sending the shekel down 10% versus the dollar as the country's risk premium has risen.

"The executive and legislative institutions have become less predictable and more willing to create significant risks to

economic and social stability," Moody's said.

It cited data that some 80% of new Israeli startups have chosen to register overseas this year, up from 20% in 2022, while the Tel Aviv and Nasdaq share exchanges have diverged.

"This is particularly concerning given that the country's high-tech sector has become the key engine of economic growth," Moody's said.

Moody's projects growth in Israel of 3% in 2023 and 2024 but its forecast "does not incorporate a negative effect from a prolonged period of social and political tensions".

Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich - proponents of the judicial overhaul - downplayed the Moody's report.

"This is a momentary response; when the dust clears, it will be clear that the Israeli economy is very strong," they said in a joint statement.

But Arnon Bar-David, chairman of the Histadrut labour federation, said the report was proof that the crisis is taking its toll in Israel, socially and economically.

"The rating agency's dire comments are a glaring warning sign to anyone who has so far ignored the need for broad consensus on reform," said Bar-David, who heads Israel's largest public sector union and has said he was considering a general strike.

"I call on the Prime Minister and the Minister of Finance to come to their senses, show responsibility and immediately stop the damage to the economy," he added.

(Reporting by Steven Scheer; Editing by Ari Rabinovitch and Nick Macfie)