The lira traded at 1.9021 versus the dollar by 1605 GMT, compared with 1.8805 on Friday afternoon. The currency has lost nearly 23 percent versus the greenback so far this year, reaching its weakest ever level of 1.9095 on Oct. 4.

"There was a strong corporate buying on the market today. This was the main reason of the lira's decline. They nearly bought $300 million," said a trader of a bank in Istanbul.

Turkish companies are buying dollars because the current account deficit has left Turkey vulnerable to external shocks.

The shortfall widened to around 10 percent of gross domestic product this year, fuelled by a credit boom which has driven domestic demand. It is seen as a key challenge for Turkish policy makers.

"The biggest risk in our view is the large open FX position of Turkish corporates. However, we see them being able to deal with this as they did in 2009," said Sengul Dagdeviren, an economist at ING Bank.

Against a euro-dollar basket the lira traded at 2.1884, 0.7 percent weaker compared with a previous close of 2.1698.

Istanbul's main share index was down 1.79 percent at 50,742.08 points, underperforming the MSCI emerging markets index, which was 1.41 percent down.

"Volumes are very low and we see very few foreign investors on the market due to holiday season. There isn't a specific reason to push down shares, but we can say pessimistic reports had added to the risk sentiment which was already very low," said Omer Omerbas, a research director at Ekspres Invest.

A report published by Morgan Stanley on Dec. 16 said that a sharp slowdown is on horizon for the Turkish economy.

The yield on Turkey's new benchmark bond maturing on Dec. 4, 2013 closed at 10.46 percent, higher than Friday's close at 10.29 percent. Volumes remain excessively low on the bond market due to the year-end effect, traders said.

Turkish markets will monitor the central bank's monthly monetary policy committee meeting on Thursday. The bank is expected to keep its policy rate on hold.