ISTANBUL: The lira's weekly losses against the dollar reached almost 4 percent on Friday as Turkish air strikes on Islamic State insurgents in Syria and nationwide police raids on militants fuelled investor concerns about Turkey's security risks.
Fears of a snap election if efforts to form a coalition government fail also weighed on sentiment, with the two-year benchmark bond yield rising above 10 percent for the first time since mid-June.
Central bank steps to support the lira provided some support to markets.
Shares edged higher after sharp losses on Thursday.
Turkish warplanes hammered Islamic State targets in Syria and police detained hundreds of suspected militants early on Friday, a sign Ankara may have shed its hesitancy in taking a front-line role against militants.
Prime Minister Ahmet Davutoglu told reporters operations against all the militant groups would continue.
"The escalation of geopolitical risks together with the ongoing political uncertainties about the formation of a new government has amplified volatility in the financial markets," Finansbank economist Deniz Cicek said in a note.
The lira hit 2.7500 against the US currency by 1028 GMT, marking a 3.6 percent loss on the week -- far underperforming the currency's emerging market peers and the biggest weekly loss since the June 7 election.
The lira rebounded temporarily during the morning after the central bank cut its US dollar one-week deposit rate to 3 percent from 3.5 percent and raised the remuneration rate which it pays on forex required reserves to 0.21 percent from 0.15.
Bankers said such measures alone would not be enough to eliminate selling pressure but it was important that the bank showed it was ready to act.
"We do not think that banks will tap that (depo) facility now," said BGC Partners chief economist Ozgur Altug, noting that it was last used by banks in late 2012 but saying the rate was starting to normalise.
"Until today the interest rates of this facility were relatively high. Now they started to make some sense," he said.
The latest central bank moves came after it kept key interest rates on hold for a fifth straight month on Thursday, avoiding any mention of political uncertainty and focusing on food and energy prices.
Investors were also keeping an eye on coalition talks between Davutoglu's AK Party and the main opposition Republican People's Party (CHP), with delegations from the two parties set to meet on Friday afternoon for low-level talks.
"We believe events that unfolded yesterday might have profound consequences in AKP-CHP coalition talks and may make both sides more amenable in building a coalition at this difficult juncture for the country," said TEB Investment strategist Isik Okte.
The two-year benchmark bond maturing on June 14, 2017 rose as far as 10.05 percent in early trade, its highest since mid-June, compared with Thursday's spot close of 9.83 percent.
The 10-year benchmark bond maturing on March 12, 2025 rose as high as 9.76 percent from Thursday's spot close of 9.48 percent.
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