TEL AVIV (Reuters) - Warren Buffett's acquisition of a majority stake in an Israeli engineering firm for $4 billion sparked hopes on Sunday that more foreign investors will follow suit.

Buffett, widely regarded as one of the world's savviest investors, announced on Friday that his company Berkshire Hathaway Inc. (Research) would use some of its nearly $43 billion in cash to boost its international presence, acquiring 80 percent of privately held Iscar Metalworking Cos.

The purchase is one of the largest deals involving an Israeli company and Buffett's biggest investment outside the United States.

The deal looked set to raise awareness among foreign investors about the potentials of the Israeli economy, which grew 5.2 percent in 2005 and is forecast to expand 4-4.5 percent this year on the heels of global growth and a shift to free-market policies.

"This is certainly a vote of confidence in Israel and reduces the risk factors that some investors might associate with investing in Israel. Some investors view Israel as a risky place but Buffett is not a risk taker by any means," said Richard Gussow, a senior analyst at the Excellence Nessuah brokerage in Tel Aviv.

However, Gussow said that future investments will also depend on economic and political developments in Israel.

Berkshire's deal follows an announcement by Intel Corp. (Research) in December that it will build a chip plant costing more than $3.5 billion in the southern Israeli town of Kiryat Gat, home to an existing Intel plant.

Foreigners invested nearly $10 billion in Israel last year, including almost $6 billion in direct investment as the tech-rich economy rebounded from a global downturn earlier in the decade and as violence between Israel and the Palestinians eased.

Vered Dar, chief economist at the Psagot Ofek brokerage, said Buffett's moves were widely watched.

"If he is investing in Israel such a substantial sum, he obviously knows something that we should learn from," she said. "This type of publicity is worth a lot to Israel's economy and capital market."

Israeli shares surged on the news, with the main indices gaining over 2.5 percent on Sunday to record levels. Since the March 28 Israeli election, shares have risen about 8 percent.

The currency market is closed on Sunday but trading in shekel dollar options on the bourse indicated a rate of 4.44 shekels per dollar, compared with Friday's official rate of 4.4710. The shekel has strengthened from 4.70 on March 29.

"The huge increase in capital inflows as a result of the Iscar deal of $4 billion, even if not all of the amount is converted to shekels, is expected to contribute to the continued strengthening of the shekel," Tel Aviv brokerage Leader Capital Markets said in a report.

Iscar, based in Tefen in northern Israel, manufactures metalworking tools used by makers of heavy equipment such as cars and planes. It has facilities in Tefen, the United States, Brazil, China, Germany, India, Italy, Japan and South Korea.

Stef Wertheimer founded Iscar 50 years ago and his family will retain 20 percent of the company.

Iscar will continue to be managed by its current team, including Chairman Eitan Wertheimer, son of the founder.

Israeli newspapers quoted Buffett as saying over the weekend in Omaha, Nebraska, where Berkshire is based, that he plans further acquisitions of Israeli companies and will visit in September to inspect his investment and examine the local business scene.

Israeli Prime Minister Ehud Olmert hailed Buffett's acquisition as a boon to the Israeli economy.

"He is saying he supports and believes in the stability of the Israeli economy and says what we only say in our dreams," Olmert told reporters.

The deal will be a windfall for Olmert's new government, which is expected to reap about $1 billion in taxes from the deal, or more than 2.5 percent of annual tax revenues in Israel.

If the entire sum is received this year, the government could close the year without a budget deficit, Dar said, though she noted that budget surpluses often lead to political pressures to expand public spending.

The additional revenues will facilitate the government's plans to lower taxes and could also reduce the amount of funds the government will need to raise, which would support Israeli bond prices.

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