* Hapoalim Q1 net profit 621 mln shekels vs 629 mln forecast
* Leumi Q1 net profit 570 mln shekels vs 610 mln forecast
* Discount Q1 net profit up 6.5 pct, interest income falls (Adds details, analyst comments, share reaction)
By Tova Cohen
TEL AVIV, May 30 (Reuters) - Tough economic conditions and low interest rates hurt first-quarter profits at Israel's top two banks Hapoalim and Leumi, and two surprise rate cuts in May are expected to have a further impact in the coming quarters.
Hapoalim and Leumi both missed analysts' forecasts owing to lower financing income. The Bank of Israel cut its key lending rate to 1.75 percent in the first quarter from 2.75 percent in early 2012 and since May 13 lowered it further to 1.25 percent.
The central bank has been battling an appreciation of the shekel which threatens Israel's exports. Israel's economy has also been slowing - growth this year is seen at 2.8 percent from 3.2 percent in 2012.
Hapoalim profit fell to 621 million shekels ($168 million) from 659 million a year earlier, slightly below expectations of 629 million shekels in a Reuters poll of analysts. Net financing income slipped to 2.06 billion shekels from 2.15 billion.
Leumi posted net profit of 570 million shekels from 431 million a year earlier, below forecasts for 610 million. Net interest income fell 3.6 percent to 1.76 billion shekels.
Both banks have reduced their exposure to large corporate debtors and increased credit to households and small business sectors in an attempt to bolster their bottom line.
But Psagot brokerage analyst Terence Klingman said a decline in demand for credit was still hurting the banks' ability to increase interest income while interest rate cuts exerted further pressure on margins.
"A further decline in economic activity and the Bank of Israel's interest rate will lead us to review our rating," said Klingman, who maintained a "buy" rating for Hapoalim, Israel's biggest bank.
Hapoalim shares were up 0.2 percent at 17.15 shekels at 1209 GMT, compared with a 0.1 percent rise in the Tel Aviv 100 index and 0.3 percent gain in the banking index. Leumi shares were down 0.9 percent to 12.86 shekels.
Hapoalim also posted a one-time credit loss provision of 84 million shekels to comply with a Bank of Israel directive relating to loans in the housing sector.
Leumi's profit was boosted by a one-time gain of 180 million shekels from the sale of shares in Migdal Insurance.
Hapoalim's core Tier 1 capital ratio to risk-weighted assets rose to 9.1 percent at the end of the quarter from 8.9 percent at the end of 2012 while's Leumi's core Tier 1 ratio increased to 8.84 percent from 8.55 percent.
The Bank of Israel has called on banks to hold core Tier I ratio of at least 9 percent by the end of 2014 as part of a global drive to strengthen the industry and prevent a repeat of the 2008 financial crisis.
Israel Discount Bank, the No. 3 lender, reported a 6.5 percent rise in quarterly net profit to 263 million shekels but its net interest income fell 4.9 percent.
$1 = 3.69 shekels additional reporting by Steven Scheer; editing by Sophie Walker