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Lira dropped 12.7% in early trade to record low of 42 to

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dollar

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International bonds tumble more than 1 cent

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Stocks down around 6% in worst day since late 2023

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Analysts worried about knock on for monetary policy

(Adds throughout with new stock levels, new analyst comment)

By Ezgi Erkoyun and Canan Sevgili

ISTANBUL, March 19 (Reuters) - Turkey's lira fell as

much as 12.7% and touched a new all-time low of 42 to the dollar

on Wednesday, with bonds and stocks also tumbling sharply, after

authorities detained President Tayyip Erdogan's main political

rival.

The move against Ekrem Imamoglu, the mayor of Istanbul, was

called "a coup attempt" by the opposition and appears to cap an

aggressive months-long legal crackdown on opposition figures

across the country which has been condemned as a politicised

attempt to silence dissent.

Imamoglu was expected to be named as the main opposition's

presidential candidate within days.

The lira traded at 38.90 to the dollar at 1016

GMT, from a close of 36.67 on Tuesday, having recouped some of

the losses from the all-time low it hit earlier - but still

having had its biggest decline since July 2023. The earlier

tumble to 42 marked one of the lira's largest absolute intraday

moves on record.

Turkey's international government bonds also came under

pressure with longer-dated maturities suffering the sharpest

falls. The 2045 maturity fell 1.6 cents to be bid at 85.117

cents, its lowest level since

"In Turkey this morning, bonds and FX are coming under

pressure after a potential presidential candidate, the mayor of

Istanbul, was arrested," said Frantisek Taborsky, EMEA FX &

fixed income strategist at ING.

"(Turkey's lira) is the most heavily positioned carry-trade

in the emerging markets space at the moment in our view, and a

sharp move could potentially lead to further outflows. On the

other hand, we should see local banks providing some FX

support."

MONETARY POLICY

Finance Minister Mehmet Simsek said they were doing

everything necessary to ensure healthy functioning of the

markets, without giving further details.

Bankers calculate that the Turkish central bank sold a

minimum of $5 billion in FX after lira's crash, while some say

it may have already reached $10 billion for the day.

Analysts and investors were also concerned about the knock

on effect for monetary policy, worrying that the sharp decline

in the lira could delay or halt the rate-cutting cycle since the

central bank has been ensuring real appreciation of the currency

for months.

The central bank had in December embarked on an easing cycle

for the first time after an 18-month tightening effort that

reversed years of unorthodox economic policies and easy money

championed by Erdogan, which had seen the economy run red hot

and inflation exceeding 70%. Erdogan has supported the steps by

the central bank for a more orthodox policy.

"With this FX shock they need to keep rates where they are

for now," one banker said.

Stocks also crashed, reflecting investor worries over rule

of law. Turkish blue-chip stocks fell by nearly 6%, set

for their worst daily performance since late 2023.

The banking sub-index declined 9.67%. Borsa Istanbul

said trading was halted temporarily after the main BIST 100

index fell 6.87% in early trading and the market-wide circuit

breaker was triggered.

"A wave of selling was triggered after Imamoglu's diploma

was annulled and he was detained. There have been foreign

investor inflows in recent days ... but political uncertainty

currently prevails and concerns about foreign investors leaving

the country have increased," Serhat Baskurt, algorithmic

operations manager at ALB Yatırım, said.

Baskurt said he expected the decline on the stock exchange

to continue over the coming days.

Borsa Istanbul said that the uptick rule on short sale

transactions for the BIST 50 index would be used on Wednesday.

The rule requires short sales to be conducted at a higher price

than the previous trade.