"In order to build confidence among both foreign and domestic investors, there must be a narrative which is not divorced from the market reality," said Seda Yalcinkaya, an analyst at brokerage Integral.

The selling accelerated later in the day after local media quoted Erdogan as saying he believed interest rates would fall. That helped to send the lira to its weakest since May 23, the day the central raised interest rates at an emergency meeting to shore up the currency.

The lira stood at 4.8270 to the dollar at 1553 GMT (1.53am AEST), weakening more than 2.5 per cent from Tuesday's close of 4.7062. It hit a low of 4.8492 earlier.

Banks hit hard

The currency has lost more than a fifth of its value against the dollar so far this year, hit by worries that Erdogan's drive for lower rates would erode the central bank's ability to fight inflation.

Turkish President Recep Tayyip ErdogaN AP

Investors are also selling bank stocks, reflecting fears that Turkish lenders could face a wave of bad debts as overextended companies struggle to repay foreign-currency loans. Turkish firms had $US225 billion in long-term, overseas borrowings as of April, almost all in dollars or euros, central bank data shows.

"Decision making is increasingly centralised," Standard & Poor's senior sovereign analyst Frank Gill said this week. "Where is the growth going to come from, given that we feel the funding capacity of the banks is close to exhausted?"


Moody's, another credit ratings agency, has warned that Turkish banks could face a jump in problem loans if the lira continues to weaken, citing an estimated $US78 billion in short-term foreign exchange refinancing needs.

The Istanbul bourse's index of bank stocks fell 9.19 per cent by Wednesday's close, recording its biggest one-day fall since June 2013.

The BIST 100 stock index fell 5.18 per cent, recording its biggest one-day fall since a failed military coup attempt in July, 2016. The yield on Turkey's benchmark 10-year bond rose to 18.48 per cent from 17.36 per cent at Tuesday's close.

Reuters