ANKARA (Reuters) - Turkey urged the United States on Monday to review its suspension of visa services after the arrest of a U.S. consulate employee sharply escalated tension between the two NATO allies and drove Turkey’s currency and stocks lower.

Relations between Ankara and Washington have been plagued by disputes over U.S. support for Kurdish fighters in Syria, Turkey’s calls for the extradition of a U.S.-based cleric and the indictment of a Turkish former minister in a U.S. court.

But last week’s arrest of a Turkish employee of the U.S. consulate in Istanbul marked a fresh low. Turkey said the employee had links to U.S.-based Muslim cleric Fethullah Gulen, blamed by Ankara for a failed military coup in July 2016. Gulen denies any connection with the coup.

The U.S. embassy in Ankara condemned Ankara’s charges as baseless and announced on Sunday night it was halting all non-immigrant visa services in Turkey while it reassessed Turkey’s commitment to the security of its missions and staff.

Within hours, Ankara announced it was taking the same measures against U.S. citizens seeking visas for Turkey.

The U.S. ambassador said the duration of the visa services’ suspension would depend on talks between the two governments about the reasons for the detention of local staff in Turkey.

In a written statement late on Monday, Ambassador John Bass said the length of the suspension would also depend on “the Turkish government’s commitment to protecting our facilities and personnel here in Turkey”.

He noted that the move was not a visa ban on Turkish citizens, that valid visas could still be used and visa applications could be made outside of Turkey.

The U.S. Embassy had been unable to learn the reasons for the arrest of its Turkish staff member last week or what evidence exists against the employee, Bass said, adding that he had not been allowed sufficient access to the employee’s lawyer.

Justice Minister Abdulhamit Gul said that if Washington had serious security concerns about its missions in Turkey, steps would be taken to address them.

“But if it’s an issue regarding the arrest of the consulate employee, then this is a decision the Turkish judiciary has made,” Gul told A Haber television. “Trying a Turkish citizen for a crime committed in Turkey is our right.”

The Turkish foreign ministry summoned a U.S. diplomat to urge the United States to lift the visa services suspension, saying it was causing “unnecessary tensions”, and President Tayyip Erdogan also criticized the U.S. move.

“For the (U.S.) embassy in Ankara to take such a decision and implement it, it is upsetting,” Erdogan told a news conference during a visit to Ukraine.

A woman waits in front of the visa application office entrance of the U.S. Embassy in Ankara, Turkey, October 9, 2017. REUTERS/Umit Bektas

State-run Anadolu news agency said another U.S. consulate worker had been summoned to testify over his wife and daughter’s suspected links to Gulen - which it said had emerged during the questioning of Metin Topuz, the employee arrested last week.

INVESTORS RATTLED

The diplomatic spat spooked investors. The lira dropped 3.4 percent and stood at 3.7385 against the dollar after being quoted overnight as touching a level of 3.9223.

The main BIST 100 stock index fell as much as 4.7 percent, closing the day down 2.73 percent at 101,298 points.

Airline shares were particularly hard hit, with flag carrier Turkish Airlines falling 9 percent.

The central bank said it was following developments closely.

“This looks like a really serious situation,” said Blue Bay Asset Management strategist Timothy Ash. He added that the central bank would need to move quickly to calm market nerves and possibly hike interest rates - something Erdogan has resisted.

Turkey’s leading business association, TUSIAD, warned that the dispute would harm bilateral economic, social and cultural ties, and called for disagreements to be settled calmly.

The row with the United States coincides with deep strains in Turkey’s relations with Germany, another key ally, and with Turkish military activity at the Syrian and Iraqi borders, though their market impact has so far been limited.

U.S.-Turkish tensions have risen in recent months over U.S. military support for Kurdish YPG fighters in Syria, considered by Ankara to be an extension of the banned PKK which has waged an insurgency for three decades in southeast Turkey.

Turkey has also pressed, so far in vain, for the United States to extradite Gulen, viewed in Ankara as the mastermind behind the failed coup in which more than 240 people were killed.

Friction with the United States has also arisen from the indictment last month by a U.S. court of Turkey’s former economy minister Zafer Caglayan on charges of conspiring to violate U.S. sanctions on Iran.

Sinan Ulgen, an analyst and former Turkish diplomat, said those underlying disputes had created a crisis of confidence which made this latest fall-out particularly bitter.

“This harshness is a result of a build-up,” he said. “We should not consider this as solely a reaction to the detentions of consulate employees”.