Turkish financial markets were in turmoil today as the Turkish lira fell sharply and the stock market plunged following a weekend of political uncertainty that unsettled investors.

A tense stand-off between the Islamist-rooted government and the secularist Turkish army over presidential elections risks unnerving foreign investors who have returned to the high-growth country since a financial crisis in 2001, analysts said.

“Turkish markets will obviously be driven by politics this week,” said economist Claire Dissaux at Calyon, an investment bank.

The leading index on the Turkish stock exchange, which groups the 100 biggest Turkish companies, fell 8 percent at the opening on Monday before rising slightly off its lows.

In midday trading, it showed a loss of 6.23 per cent.

The Turkish currency, the lira, opened 4 per cent weaker against the euro and lost about 4.4 per cent against the dollar, its biggest fall since a broad selloff hit emerging country markets in May and June last year.

Tensions rose late Friday when, hours after a first, inconclusive round of voting in parliament for a new president, the army General Staff issued a stiff statement threatening to take action if the government did not do more to preserve the republic’s secular tradition.

The government responded the next day in words just as strong by calling the General Staff to order and reminding it that it remained under the orders of the prime minister’s office.<QA1>

“After the army stepped in, everything changed. We all remember what happened 10 years ago,” said analyst Arzu Odabasi at Global Securities, a brokerage.

She was referring to the ousting in 1997 of Turkey’s first Islamist prime minister Necmettin Erbakan after strong pressure from the army, which accused him of damaging Muslim-majority Turkey’s jealously guarded secular system.

“For the moment, the situation is confused,” she said.“We have 48 hours to get all this over with and then we’ll see things more clearly."

The army has toppled three governments in recent Turkish history, in 1960, 1971 and in 1980. The military move followed legal action by the opposition to have the Constitutional Court, Turkey’s highest tribunal, annul the first round of the election whose sole candidate is Foreign Minister Abdullah Gul, a former Islamist.

The court is expected to return a verdict within 48 hours, before the second round of voting on Wednesday afternoon.

Dissaux at Calyon said the financial instability today was because investors “had practically failed over the past few weeks to price any of the risks related to the election period, with the lira at its strongest level versus the dollar since May 2006 and equities booming.”

In early morning trade in London, the European single currency climbed as high as 1.8976 Turkish lira -- which was the highest level since mid-March and compared with 1.82 lira late on Friday.<QA1>

The dollar meanwhile rose to 1.3932 Turkish lira, compared with 1.3350 late on Friday.<QA1>

The Istanbul stock market plunged 8.0 percent at the opening Monday losing 3,745.2 points from Friday’s close.<

Analyst Nicolas Bouzou at French research group Asteres said the political uncertainty risked scaring foreign investors and the army’s role in Turkish public life could scupper the country’s bid to join the European Union.

“If the situation gets worse, if the army’s interference in the democratic process is more visible, then that could dissuade companies from investing in Turkey,” he warned.

Turkey has staged an impressive economic recovery since the current government stormed to power in 2002, ending more than a decade of weak coalition governments.<QA1>

Inflation, which stood at 29.7 percent in 2002, has been reduced to 9.65 percent in 2006, and economic growth averaged more than 7.0 percent between 2003 and 2006, compared with an average of 2.6 percent in the decade to 2002.

Analysts believe further political stability is crucial as Turkey needs to address remaining weaknesses in its booming 400-billion-dollar economy, such as a record current account deficit of 31.3 billion dollars in 2006.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts