Political fears rock Turkish lira

Prime minister Bulent Ecevit's poor health has fuelled political uncertainty in Turkey

ISTANBUL, Turkey -- The Turkish lira has plunged to an all-time low against the dollar amid fears that a $16 billion IMF rescue may be sidelined by elections.

Battered by political turmoil, the lira, which halved in value amid last year's financial crisis, sunk to a low of 1,706,000 versus the dollar in early trading on Tuesday.

It later recovered some ground and stood at 1,664.500 lira after the central bank raised interest rates it pays on banks' lira reserve requirements by 3 percentage points to 25 percent

Over the last two months, the lira has come under more pressure as concern over the ailing health of Prime Minister Bulent Ecevit crippled and divided the Turkish government.

Deputy Premier Husamettin Ozkan, considered one of Ecevit's closest aides, quit on Monday along with the culture minister and two other state ministers amid signs of a growing rebellion against the prime minister. All four were from Ecevit's Democratic Left Party (DSP).

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The departures will increase pressure on Ecevit, 77, to resign.

They came only hours after the head of the right-wing Nationalist Action Party, Devlet Bahceli, said a November election would help end uncertainty fuelled by the prime minister's poor health and divisions within the government.

Turkish stocks dived at the start of trading, falling more than 4 percent after losing 4.7 percent on Monday on concerns the IMF's rescue plan could be derailed. The benchmark ISE National 100 index was down 0.5 percent at 8,866.43 at the end of morning trade.

If the IMF plan is derailed it could also hamper reforms vital to the nation's ambition to join the European Union.

"We just don't want to blow the IMF programme in such a critical period. I hope a few of the parties realise it will create a very unpalatable environment if the IMF says it's going to suspend the programme," Hakan Avci at Global Securities told Reuters.

The IMF-backed plan is seen as crucial to the country's bid to save the economy from its worst recession since 1945, and progress with the EU is considered vital to lure foreign investment.

Economy Minister Kemal Dervis stepped in on Monday in an apparent bid to help the lira after it hit a low. "There should be no reason for deviation in targets [under an IMF-backed crisis plan] if the situation does not prevail too long," he told Reuters.

Newspaper reports that Dervis -- an former World Banker drafted into the government after last year's financial crisis -- may join the rebels from the DSP in forming a new party also helped markets recover some losses.