Global risk appetite diminished after euro zone policymakers ended a weekend meeting without agreeing new ways to tackle the debt crisis, and international lenders told Greece on Monday ahead of a key conference call that it must shrink its public sector to secure its next aid payment.

The lira traded at 1.8100 versus the dollar, its weakest since Sept. 9 and compared with Friday's close of 1.7790.

News the call between Athens and its lenders had been put back to 1600 GMT further impacted sentiment "by suggesting something very bad could be announced," said a forex trade desk manager at a bank in Istanbul.

On the interbank market the lira closed at 1.8000 versus the dollar.

"There were stop losses at the 1.8000 level which caused the sharp decline in the lira. However we are seeing all emerging currencies weakening.

This is a general sell-off around the globe due to risk aversion," the forex trade manager added.

The benchmark May 15, 2013 bond yield rose to 8.27 percent compared with 8.09 percent in late Friday trade.

"The decline of the lira against (a euro/dollar) basket affected bonds negatively.

The market is also waiting for tomorrow's (central bank policy) meeting," said Murat Oner, pension funds division head at Yapi Kredi Bank.

Of 13 analysts polled, 12 see the bank holding its policy rate at a record low of 5.75 percent.

Against the basket , the lira traded at 2.1348 by 1444 GMT compared with 2.1174 on Monday morning. The basket peaked at 2.2115 in early August.

"The common anticipation is that the central bank would hold the policy rate as well as the reserve requirement ratios (RRRs) at their current level which I believe, wouldn't have any effect on yields. However, if the bank cuts the forex and lira RRRs which is also my expectation, then yields could go down further," Oner said.

The main Istanbul share index closed 0.06 percent up at 57,933.24 points, outperforming the emerging markets index which was down 3.15 percent.

Turkish equities closed 1.77 percent higher on Friday.

"In the last few days we saw favorable reports recommending to buy Turkish equities, especially banks' shares.

This contributed to the opening of new positions which investors currently prefer to maintain. This can be a reason for Turkish equities to decouple from external markets," said local markets manager Ilter Bulut at A Investment.

"If the index doesn't go below the 57,500-57,000 levels, it can move towards 59,000."

Copyright Reuters, 2011