Turkish stocks fell sharply as oil prices rose above $100 a barrel, prompting investors to sell shares of energy-dependent Turkish companies.
Data this week indicating inflation pressure in Turkey is easing has raised expectations the central bank could soon cut its overnight lending rate to shore up a slowing economy and that has boosted bond prices.
The yield on Turkey's two-year benchmark bond closed at 8.06, its lowest since September 2011, compared with a previous close at 8.17 percent.
"Bonds are very strong due to the fall in inflation and expectations that the central bank will reduce the banks' funding costs in the coming period," said Ozlem Derici, economist at Erste Securities Istanbul.
"I expect the central bank to narrow the upper limit of the interest rate corridor by 50 basis points. Until the rest of the year I expect a total cut of 200 basis points," Derici said.
The central bank's overnight lending rate stands at 11.50 percent while the one-week repo policy rate is at a record low of 5.75 percent. The central bank will hold its monthly policy meeting on July 19.
Turkey's main share index dropped 1.6 percent to 61,972 points, largely underperforming a 0.22 percent decline in the MSCI emerging markets index.
The index rose earlier in the day but shares retreated after the index broke a key resistance level and as oil prices gained ground.
"Due to the rise in oil prices, investors started to buy Russian shares and sell Turkish equities. Besides, today the (Istanbul) main index broke the resistance at 62,950, hence investors also sold for profit taking," said Isik Okte, strategist at Halk Invest.
The country's dependence on energy imports makes the economy vulnerable when oil prices rise. Turkey runs a current account deficit that reached 10 percent of gross domestic product last year, a key concern for investors.
By 1444 GMT, the lira traded at 2.0248 versus a euro-dollar basket, stronger than 2.0374 late on Wednesday. Against the dollar, it stood at 1.8095, almost flat compared with 1.8080 late on Wednesday.
Analysts said the lira firmed versus the euro-dollar basket on expectations that global liquidity will increase after China and the European Central Bank cut rates on Thursday.