Financial markets tumble following a mass demonstration against the ruling party.
Turkey's financial markets tumbled on Monday amid political instability triggered by a court challenge to the presidential election process and a mass demonstration against the ruling party.
Fears of military intervention, prompted by an army warning to the Islamist-rooted AK Party government that it would protect the secular state, added to the woes. The main share index fell as much as 8%, while bond yields rose a percentage point and the lira currency slid four per cent.
Markets had staged a partial recovery by the close of trade in what was the biggest sell-off in nearly a year.
Despite a court challenge to the presidential poll led by the secular opposition, Foreign Minister Abdullah Gul has stuck to his guns and said he will remain the AK Party's candidate.
"We expect the uncertainty to continue and the Turkish markets could well extend their losses further," said Danske Bank senior analyst Lars Christensen in Copenhagen.
"It is obvious that the situation is very serious and the massive sell-off in the markets is fully justified - especially in the light of the military's confrontational reaction to Gul's presidential candidacy," he said.
The lira currency lost as much as 4.5%, weakening to 1.3930 against the dollar, before closing at 1.3600 on the interbank market versus Friday's close of 1.3340.
Deputy Prime Minister Abdullatif Sener sought to reassure markets, saying the central bank had strong foreign currency reserves and he saw no exchange rate risks.
As many as one million people attended an Istanbul rally on Sunday, accusing the government of planning an Islamist state and calling for it to withdraw Gul's candidacy. They say the former Islamist will divide Turkey, which is constitutionally secular and has a predominantly Muslim population of 74 million.
The army General Staff raised the stakes on Friday, hours after the inconclusive first round of voting in parliament on Gul's nomination, with a threat to intervene in the election, but analysts played down this danger.
"Although we view as groundless market concerns on a military coup, holding elections as soon as possible could ease the tension and shorten the period of uncertainty," said London-based Morgan Stanley economist Serhan Cevik.
Tayyip Erdogan - facing his biggest crisis since becoming prime minister - will give a regular televised addresses to the nation at 1715 GMT. These statements usually focus on government successes, but the crisis has heightened interest in it.
"Tuesday's action will hinge on what Erdogan says and how he says it in his national address," said Ayse Colak, CFA and director of research at Tera Stockbrokers in Istanbul.
The main share index fell 8% before cutting its loss in half to close down 4.01% at 44,984.45.
The benchmark February 4, 2009 bond yield opened at 19.55%, up from Friday's close of 18.47%. On Monday it finished trade at 19.22%.
Turkey's portion of the main JP Morgan EMBI Plus bond index widened 11 basis points to some 205 bps over U.S. Treasuries, while the benchmark bond was bid 1.313 points lower to lift the yield to 7.009%.
"We see great probability on a call for early elections to ease tensions. If not, the tension increases and the market reacts more negatively. The risk premium has increased but early elections will curb its rise," said Colak.
Turkey's woes did not have a dramatic impact on overall investor sentiment in emerging markets, with the MSCI emerging markets stock index trading down just 0.38%.
Bear Stearns economist Timothy Ash said the downward move may be accentuated by many foreign investors being overweight in Turkey. Foreign money invested in its equity and fixed income markets is close to $75 billion, or around 15% of GNP.
The main secularist opposition party, CHP, has asked the Constitutional Court to rule the presidential election invalid. The court says it will deliver its verdict by Wednesday.