Turkey shares struggle to find footing as tensions rise after Istanbul mayor jailed

By Canan Sevgili

March 24 (Reuters) - Turkish stocks struggled to hold onto gains on Monday following last week's slump with tensions in the country running high after a court jailed Istanbul Mayor Ekrem Imamoglu pending a trial.

The Borsa Istanbul benchmark index .XU100 ended last week down 16.6%, its worst drop since the global financial crisis in October 2008.

The index was up 1.87% by 1430 GMT, paring earlier gains of as much as 3.8% in a volatile session which often saw it dip into negative territory. The banking sub-index .XBANK reversed a rise of 4.25% to stand 0.12% higher, after last week's more than 26% tumble.

A Turkish court on Sunday jailed Istanbul Mayor Ekrem Imamoglu, President Tayyip Erdogan's main political rival, pending trial on corruption charges in a move that sparked the country's biggest protests in more than a decade.

Imamoglu's detention last Wednesday roiled markets, sending the lira, stocks and bonds sharply lower, and prompted an outcry from the main opposition party, European leaders and hundreds of thousands of protesters, who criticise the actions against him as politicised and undemocratic.

Analysts expect a prolonged period of political turmoil and uncertainty.

"The protests mark the most significant and widespread public reaction in over a decade, making the trajectory of events difficult to predict," said Wolfango Piccoli at Teneo.

"Once again, President Erdogan's political agenda has inflicted serious damage on Turkey's economic outlook."

The country's capital markets board on Sunday banned short selling on the Istanbul bourse and eased share buyback limitations and equity ratio requirements until April 25.

Those measures were an important step to prevent sharp losses, but likely not enough to prompt a lasting market recovery, said Ahmet Deniz Yagbasan, a research analyst at Ahlatcı Menkul Degerler.

"While short-term uncertainties have eased, new medium- and long-term risks are emerging, increasing market risk perception." Yagbasan added.

LIRA STEADIES

The lira TRYTOM=D3 traded at 37.9955 against the U.S. dollar, compared with Friday's close of 37.9500 after falling 3.5% last week. In a meeting with bank executives on Sunday, the central bank said it would use all instruments effectively and decisively to maintain stability.

"We expect a steadier Turkish lira after dramatic events in recent days," Barclays said in a note. "(Lira) stability is the most important component of the government's economic programme and is thus likely to be restored before long."

Barclays now expects the Turkish central bank to hold its policy rate at 42.5% rather than cut it next month.

Turkey's international sovereign bonds also clawed back some of last week's losses, with the 2045 maturity US900123CG37=TE up 0.5 cents to be bid at 83.59 cents on the dollar, Tradeweb data showed, after falling more than 3 cents last week.

Turkey's five-year credit default swaps eased 14 basis points from Friday's close to 314 bps, according to S&P Global Market Intelligence.