JERUSALEM, Aug 14 (Reuters) - Fitch Ratings on Monday affirmed Israel's 'A+' sovereign credit rating and "stable" outlook, saying the country's public finances were solid but cautioned that the government's judicial overhaul plan could hurt its creditworthiness.

"Israel's 'A+' rating balances a diversified, resilient and high value-added economy and strong external finances against a relatively high government debt/GDP ratio, ongoing security risks and a record of unstable governments that has hindered policymaking," it said.

Fitch said that while Israel's plan to limit some of the Supreme Court's powers has been "watered down", including dropping an initiative that parliament would be able to override court decisions, it remains highly controversial and faces strong civil and political opposition.

"Fitch believes the changes may have a negative impact on Israel's credit metrics if the weakening of institutional checks leads to worse policy outcomes or sustained negative investor sentiment or weakens governance indicators," it said.

The agency noted that some countries that have passed major measures reducing institutional checks and balances have seen a significant weakening of World Bank governance indicators (WBGI), but that the "implications for Israel's WBGIs are unclear."

Fitch said factors that could lead to a ratings downgrade include a decline in Israel's "institutional strength as a result of reforms weakening judicial oversight, leading to a significant negative impact on macroeconomic and fiscal indicators, or resulting in a fall in WBGI for Israel."

Finance Minister Bezalel Smotrich, a proponent of the judicial changes, said Fitch's report shows that Israel's economy is strong and stable. "Anyone who invests in Israel profits," he said.

The report came after S&P Global Ratings on July 27 warned that the controversy over Israel's plans to limit some of the Supreme Court's powers is increasing domestic political uncertainty and will lead to lower economic growth this year to 1.5% from 6.5% in 2022. S&P, though, affirmed its AA-/A-1+ credit rating and stable outlook.

The Moody's rating agency issued a similar warning.

Financial markets bounced after Fitch's announcement, with key Tel Aviv share indices gaining 0.4% and the shekel appreciating to 3.72 per dollar from 3.74.

Fitch projects Israel's economic growth at 3.1% in 2023 and 3% in 2024, in line with Bank of Israel estimates and seeing impact from the legal changes mainly delaying capital investment decisions.

It said that while some lawmakers have made proposals to weaken central bank independence none has been implemented. "A weakening of central bank independence would reduce the credibility of Israel's policy-making," it added.

Fitch forecasts a budget deficit of 1.6% of gross domestic product this year, 2.8% in 2024 and 4% in 2025. It sees a debt-GDP-ratio of 59% in 2023 and current account surplus of 3.6%.

It also said Israel's ratings are constrained by security risks, but that Israel's credit profile has shown resilience to periodic conflicts.

(Reporting by Steven Scheer; Editing by Toby Chopra and Sharon Singleton)