Bloomberg | Jul 26, 2018 11:30AM ET

(Bloomberg) -- The Turkish lira led losses among major currencies after the U.S. said it would impose “significant sanctions” if the nation doesn’t release American pastor Andrew Brunson.

The currency fell as much as 2.3 percent as the White House confirmed an Associated Press report that U.S. Vice President Mike Pence threatened sanctions unless Brunson is released. The lira had gotten some relief yesterday when Turkey, a NATO ally of the U.S., decided to place Brunson under house arrest after almost two years in jail. Pence said that while the status change was a welcome step, it was insufficient.

Pence Warns Turkey U.S. to Impose Sanctions If Pastor Not Freed

The standoff is an unwelcome complication for Turkey at a time when the nation is grappling with financial stress that includes accelerating inflation, a widening current-account deficit and investor perceptions that the central bank isn’t doing enough to shore up the lira. The currency is this year’s worst performer versus the dollar after the Argentine peso, weakening almost 22 percent.

The lira slid 1.4 percent to 4.8407 per dollar as of 11:15 a.m. in New York. The Borsa Istanbul 100 Index erased earlier gains as Turkish state-run lender sank 3.2 percent -- following yesterday’s 12 percent surge. The iShares MSCI Turkey ETF fell as much as 4 percent, before paring gains.

Here’s what analysts and traders say:

Cristian Maggio, head of emerging market strategy at TD Securities in London.

“I think the US is frustrated enough with Turkey’s government behaviour of keeping foreign citizens at ransom for political reasons. I think Turkey should listen to the last call before sanctions are really implemented, it’s negative until then, I think.”

Nigel Rendell, a senior analyst at Medley Global Advisors in London.

“Undoubtedly, a negative impact on Turkey. This kind of ’shotgun diplomacy’ by VP Pence only escalates the dispute surrounding Brunson."

"Given that Brunson has just been moved from jail to house arrest a more softly, softly approach would be the best way to play it. Immediate sell-off in the TRY highlights the risks to Turkey of continuing strained relations with the U.S."

Delphine Arrighi, a portfolio manager at Old Mutual Global Investors in London.

“I think headlines on the case yesterday gave the perception that relations between Turkey and the U.S. were improving."

"Today might show they are still more strained than thought and could add another layer of uncertainty for Turkish assets on top of an already very uncertain economic outlook.”

Win Thin, Brown Brothers Harriman and Co. chief emerging-market strategist in New York.