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dataaISTANBUL: Turkish bonds fell to a 3-week low as yields leapt 24 basis points on Monday as investors sold due to inflationary risks posed by a weak lira and consumer tax rises that sparked fears of an unexpected tightening in monetary policy later this week.

All 14 analysts polled by Reuters last week saw the bank holding its policy rate at a record low of 5.75 percent when the central bank holds its monthly monetary policy meeting on Thursday.

Yet, the lira's weakness and consumer tax increases announced ahead of a 2012 budget to be unveiled on Tuesday, created some uncertainty over potential for a surprise rate hike,

Turkey's government bonds weakened to three-week lows, with the yield of the benchmark bond maturing at July 17, 2013 rising 24 basis points to 8.67 percent by 1425 GMT from a previous closing level of 8.43 percent.

"The tobacco tax was increased over the week end. Coupled with the last week's special consumption tax increases, this would push inflation to higher levels which push the benchmark yield up. We are seeing local investors selling bonds," said a fixed income trader of a bank in Istanbul.

"Besides, the weakening of the lira also negatively affects the bond market. This week's major event of the central bank's meeting."

So far, the central bank strategy has been designed to help the economy make a soft landing, amid the global gloom, after a period of record breaking growth.

Turkey's unemployment rate fell in the June-August period while consumer confidence rose in September, according to data released on Monday, indicating buoyancy in the economy despite expectations of a slowdown.

By late afternoon trade the lira had slumped to 1.8625 per dollar its weakest since October 6 having opened little changed from Friday's close of 1.8355.

The currency hit its weakest ever levels against a euro-dollar basket sliding to 2.2162 from 2.1959 levels in after-hours trade on Friday. The previous weakest level against the basket had been 2.2115 in early August.

The lira struck an all time low of 1.9095 on Oct. 4, prompting the central bank to aggressively support the currency through its daily auctions, first introduced in early August.

But on Monday, the central bank disappointed the market by selling only $70 million at auction, after selling nothing during either of the previous two sessions.

Strong dollar demand from importers combined with disappointment over the auction amount to knock off steady opening levels.

The early steadiness stemmed from a recovery in global sentiment after a meeting of finance ministers and central bankers from the Group of 20 major economies on Saturday raised expectations that an EU Summit on Oct.23 will address the challenges.

The main factor in the currency markets remained concern over the handling of the euro-zone debt crisis, which has afflicted most emerging market currencies.

The main Istanbul share index was down 1.45 percent at 58,433, underperforming the MSCI emerging markets index which was up 0.5 percent.

Dealers said the weakness stemmed caution over the possibility of inflationary pressures resulting in a surprise rate hike.

On dollar bond markets, Turkey's share of the EMBI Global index widened 6 basis points to 303 basis points over US Treasuries compared to its early morning level, as Turkey came to the market with euro-bond issue.

Turkey's Treasury mandated Bank of America, Merrill Lynch and HSBC as lead managers for a 10-year dollar-denominated euro-bond issue on Monday, bankers said.

Copyright Reuters, 2011