Tel Aviv РIsraeli financial markets fell on Tuesday, as new elections appeared inevitable. with the shekel sliding 1.3 percent to a two-year low against the dollar.

Prime Minister Benjamin Netanyahu’s government, which came to power early last year, has been unravelling over a range of issues, including the 2015 budget. He said on Monday he would go to the polls unless rebellious ministers stopped attacking government policies.

A subsequent meeting with his major centrist coalition partner, Finance Minister Yair Lapid, failed to patch up differences. Netanyahu and Lapid were trading accusations in the media on Tuesday.

“Intensifying political uncertainty supports further depreciation of the shekel,” said Modi Shafrir, chief strategist at Mizrahi-Tefahot Bank’s finance division.

The shekel slipped to 3.955 per dollar – its weakest level since September 2012, the last time the dollar was above 4 shekels – from 3.914 on Monday. The Israeli currency has shed some 16 percent since July.

Bond prices also dropped, since a weaker shekel pushes up inflation by raising the price of imported goods. The benchmark 10-year government bond’s price fell 0.5 percent, causing its yield to rise to 2.17 percent from 2.11 percent.

Tel Aviv share prices declined as well. The blue-chip TA-25 index was 0.2 percent lower in early afternoon trade.

“Investors’ eyes are now mainly on Israel’s political system,” according to currency broker FXCM Israel, “with the fracture between coalition factions … worsening and expectations growing that we are close to elections.”

FXCM added that new elections before a 2015 state budget is passed would be “disastrous for Israel’s economy, and would severely harm the confidence in the market”.