The stabbing murder of an Israel Diamond Exchange dealer has sent shudders through an industry known for such trust that deals for millions of dollars in precious stones are sealed with a handshake.

Israel's tight-knit diamond community has thrived on secrecy, protected by an elaborate security system once reputed to be the best in Israel outside military installations.So it was unusual that Moshe Schnitzer, Diamond Exchange president, made a public statement earlier this month warning that the killing had frightened buyers away from the world's largest market for gemstones.

"Today, any buyer who comes asks, 'Is it true there was a murder here? Is this building secure?' " said Mr. Schnitzer, who has run the exchange for more than two decades. "We have to let the world know that this is an isolated case that happened once in 50 years."

Thieves last month evaded the exchange building's security system, stabbed Israeli broker Uri Shlibovsky to death in an upper-floor office and purloined about $4 million in jewels.

Newspaper reports have said a shutdown of video cameras during the murder suggested an inside job, and some dealers expressed fears that their private world of trust and security had been breached.

The setback in confidence couldn't have come at a worse time for Israel's diamond industry, already beset by a squeeze in profits and several other disquieting incidents.

Last year the industry was caught between slumping world sales and a sharp rise in the cost of rough stones, controlled by the South African De Beers marketing cartel in London. A half a dozen diamond brokerages went bankrupt, and more than 2,000 cutters and polishers were laid off.

The diamond fraternity also was shaken last summer when a financially troubled Israeli dealer fled the country, leaving behind millions of dollars in debt. There also have been reports, repeatedly denied, that Israeli and U.S. diamond markets are laundering points for South American drug money.

The diamond exchange is the heart of three modern high-rise buildings that make up the Diamond Center in this northern Tel Aviv suburb.

About 2,500 brokers, dealers and manufacturers are members, and many spend their days seated at rows of simple, black wooden tables buying and selling gems on the exchange floor.

To the dealers, diamonds are known simply as "goods," passed around in small bits of folded white paper that belie their real worth.

The industry was born during World War II in what is now Israel, when the historical diamond centers in the Netherlands and Belgium were put out of operation by the Nazi invasion. Israel's first dealers were Jewish refugees

from Europe who traded gems over coffee at Tel Aviv cafes.

Their sons and grandsons, often ultra-Orthodox Jews distinguishable by their black homburgs, remain at the center of a business that can operate on trust because of long friendships and kinships.

"There are no contracts, no lawyers, no deposits," noted diamond dealer Joseph Nadel, who has spent five decades in the business. "You make business with a 'Mazel.' "

The word is Hebrew for "Luck," uttered when a deal has been struck, be it for a sack of rough stones or a single, brilliant solitaire.

Nobody knows for sure how much business is transacted daily on the exchange floor or in the dozens of private offices on upper levels of the Diamond Center, admits Moshe Persky, deputy managing director of the bourse.

But each year nearly half the world's gem-quality rough diamonds pass through Israel for cutting and polishing in the factories that line the alleyways around the exchange, he says.

Last year more than 7 million carats in rough diamonds were imported into Israel, and 3.8 million carats in polished diamonds valued at $2.74 billion were exported. A carat, the main measure for diamonds, is one-fifth of a gram.

The Diamond Center is protected by double gates, hidden video cameras, metal detectors and an undisclosed number of guards who scrutinize the 12,000 daily visitors. But evidently that now is considered insufficient.

Since the murder, a Canadian company named Technologia Systems Ltd. has disclosed it's been retained by the exchange to embellish the security with voice-identification checkpoints and a digitally operated telephone system that records all calls.

Inside the exchange, there are jail-like vaults for overnight diamond storage, banks to arrange credit, armored trucks for transport, specialized insurance agents, even courts to arbitrate disputes.

In the midst of this private, self-policing world, police are seeking a murder suspect. A $250,000 reward has been offered for information leading to the killer's capture.

One broker, insisting on anonymity, said the most disturbing question in the slaying was how the thieves carried it off: "They somehow managed to turn off the building's video cameras and get away. It's very worrying."