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Turkey's Prime Minister Tayyip Erdogan waves to the crowd in Istanbul August 10, 2014. REUTERS/Osman Orsal


By Ece Toksabay

ISTANBUL (Reuters) - The Turkish lira weakened against the dollar on Friday on concerns about the situation in Ukraine and after Moody's said the political situation at home was likely to remain uncertain until at least the middle of next year, when parliamentary elections are due.

Events in Ukraine rattled investors after reports that a small column of Russian armoured vehicles had crossed overnight into an area of Ukraine where pro-Moscow rebels are battling government forces.

And Tayyip Erdogan's victory in Turkey's first direct presidential election on Sunday did not resolve the country's credit challenges, Moody's said, saying uncertainty would persist until at least after parliamentary polls, due by June 2015.

Turkish markets initially took Erdogan's win as a sign of continuity, firming early on Monday, but have since traded less optimistically. The lira weakened to 2.1742 to the dollar by 1515 GMT (1615 BST) from 2.1514 late on Thursday.

"Until the political landscape reaches some stability, the country's structural reform agenda is likely to suffer, leaving Turkey exposed to potential shifts in international market sentiment," Alpona Banerji, vice president and senior analyst at Moody’s, said in a note.

The ratings agency said the credit implications of the election would not be clear until a new prime minister is appointed in late August and the parliamentary election held.

Erdogan expects to announce his new prime minister as early as next week following a meeting of his ruling AK Party's senior leadership, he told reporters late on Thursday.

Erdogan, who remains prime minister until he is inaugurated on Aug. 28, wants a staunch loyalist as his replacement who can hold the AK Party together and win a stronger parliamentary majority in the election.

That would boost his chances of pushing through the constitutional change needed to introduce the presidential system he has long coveted for Turkey.

Moody's also forecast Turkey's economy would grow by 3 percent this year, down from 4 percent in 2013, and expressed concern about the independence of the central bank on monetary policy.

"A series of rate cuts to the one-week repo rate between January and July and one cut to the overnight borrowing rate increase inflation risks in Turkey and are likely to fuel questions about the central bank’s independence," it said.

Erdogan, wedded to the idea that high interest rates cause inflation, has repeatedly called for the central bank to make sharper interest rate cuts.

Istanbul's main share index closed down 1.13 percent at 76,692.07 points, underperforming the broader emerging markets index, which was up 0.15 percent.

The benchmark two-year government bond yield was flat at 9.24 percent.

(Editing by Alison Williams and Greg Mahlich)

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