ISTANBUL (Reuters) - The Turkish lira gained on Tuesday after Washington imposed lighter-than-expected sanctions for Turkey’s military incursion into Syria, providing some relief even while traders worried that heavier repercussions would follow.

FILE PHOTO: A merchant counts Turkish lira banknotes at the Grand Bazaar in Istanbul, Turkey, March 29, 2019. REUTERS/Murad Sezer

Nine days after he began pulling U.S. troops out of northeastern Syria, U.S. President Donald Trump imposed sanctions on Turkish government ministries and officials and demanded the NATO ally halt its attacks.

But after a week under pressure, Turkish stocks and bonds rallied, as investors noted the sanctions did not extend to Turkey’s banks or to broader U.S.-dollar financing and markets.

The relief was limited, however. German carmaker Volkswagen said it was postponing a final decision on whether to build a plant in Turkey, citing concern at “current developments” after international condemnation of Turkey’s incursion.

In early trade, the lira TRYTOM=D3 rallied as much as 0.7% before handing back most of those gains. It stood at 5.9000 at 1019 GMT, up 0.4% from a close of 5.9270 on Monday, when it tumbled on the prospect of a harsher U.S. punishment.

“The sanctions are not related to banking, so the markets will have a positive perception and we can see some movement in the opposite direction from yesterday,” said Cem Tozge, an asset management director at Ata Invest.

Still, the increasingly tense U.S.-Turkish ties would continue to cloud sentiment, he said. “The pressure will ease a bit, but the military operation continues, and as long as the international negative news flow continues we cannot expect the lira to appreciate swiftly.”

Turkey's main stock exchange BIST100 .XU100 was up 1.3% on Tuesday while sovereign dollar bonds, especially longer-dated assets, rallied. The costs of insuring sovereign debt also fell.

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Washington named Turkey’s ministers of defence, energy, and the interior in its sanctions, but it did not name Treasury Minister Berat Albayrak, who is President Tayyip Erdogan’s son-in-law.

Two people familiar with the matter said Albayrak would not travel to Washington this week for annual meetings of the International Monetary Fund and World Bank.

“His trip has been canceled,” one of the sources said. The other said his deputy Bulent Aksu would make the trip.

Trump also said steel tariffs would be re-imposed on Turkey and negotiations would be halted on a $100 billion trade deal. “I am fully prepared to swiftly destroy Turkey’s economy if Turkish leaders continue down this dangerous and destructive path,” he said.

Turkey’s attacks on Kurdish-led forces in Syria entered its seventh day on Tuesday and has rapidly reshaped the battlefield of the world’s deadliest ongoing war.

The lira, which tumbled nearly 30% in last year’s currency crisis, has fallen nearly 5% so far this month. But traders told Reuters it could be worse: state banks have been intervening to cushion the currency’s fall by selling billions of dollars since early last week.

One trader said some $2 billion was spent on Monday alone, even as the lira slid to its weakest since May.

The first economic casualty of the military move appears to be the central bank’s planned cut in interest rates later this month. On Monday, three money market traders said swaps prices no longer predicted a cut; a reduction of 100 to 200 basis points was expected before the offensive began.

Tozge said a stronger lira rally could revive such expectations, “but the size of the expected cut will be less than before.”

Koon Chow, emerging markets strategist at UBP, said the U.S. sanctions “did not touch state-owned banks as some investors had worried” and will have “low or little implication for capital flows into or out of the country.”