Factbox: Key political risks to watch in Turkey

ISTANBUL (Reuters) - Turkey's ruling AK Party is in good shape ahead of a general election due by July 2011, judging by the way Turks voted in a weekend referendum on proposals for constitutional reform.

Prime Minister Tayyip Erdogan sold the reforms as a way to strengthen democracy, help in the country's bid to join the European Union and make sure Turkey's generals did not try to overthrow an elected government as they have in the past.

Despite opponents arguing that some of the changes would undermine the independence of the judiciary and remove checks and balances on government, some 58 percent of Turks voted in favor of the reforms proposed by Erdogan's party.

The margin of victory and turnout of 77 percent will have given Erdogan confidence going into next year's poll in search of a third consecutive term of single party rule.

Following are some of the key risks to watch.

PRE-ELECTION SPENDING WORRIES

Some analysts believe the referendum result will make the AK Party more comfortable about its re-election prospects and less likely to be tempted to spend imprudently to win votes.

Investors will be wary of populist moves by the government to boost spending ahead of the parliamentary election.

Turkey's finances have come under closer scrutiny after the country's industry minister said last month fiscal reform targets would not form the basis for next year's budget, but would be used for 2012.

Investors expected Ankara to introduce the reforms, setting clear medium-term targets for growth and debt reduction, in time for the 2011 budget. The delay triggered warnings from rating agencies that deficit reduction plans may get diluted.

There is also ongoing speculation on the timing of polls, despite Erdogan saying that he won't call a snap election.

The main opposition Republican People's Party (CHP) had been revitalized by the election of new leader Kemal Kilicdaroglu in May, but voting trends evident in the referendum didn't suggest the CHP had made many inroads.

What to watch:

-- Erdogan's comments on reforms and timing of the election.

-- What are the chances of AK forming a single-party government for a third term?

GOVERNMENT-MILITARY TENSIONS

Long-running strains between the government and secularist military were aggravated by a court demand for the arrest of more than 100 people, including retired commanders and serving officers, over a plot to oust Erdogan in 2003.

According to Turkish media, the "Sledgehammer" plot was said to involve bombing historic mosques and provoking Greece into shooting down a Turkish warplane to destabilize the government.

Those tensions came to a head at the Supreme Military Council meeting last month, when the government blocked the promotion of some top officers. Analysts will now be closely monitoring comments on the strains from the newly appointed military chief, General Isik Kosaner.

He will be under pressure to defend the rank and file actively and a key test for him will come with the start of the "Sledgehammer" trial in December.

Concerns that the AK Party was seeking to undermine Turkey's secular system have been at the root of past tensions, but that issue has for now receded. The AK Party sees itself as a Muslim version of Europe's conservative Christian Democrat parties, whereas critics suspect it harbors a hidden Islamist agenda.

What to watch:

-- Comments from the new armed forces chief.

KURDISH GUERRILLA VIOLENCE

Concerns about Kurdish militant violence have temporarily subsided with the announcement by the Kurdistan Workers Party (PKK) guerrillas of a ceasefire until September 20.

However, there may be a return to violence in a long-running insurgency that has undermined the government's initiative to boost Kurdish rights.

What to watch:

-- A resumption of clashes may fuel nationalist sentiment.

DIPLOMATIC TESTS

Turkey is keen to defuse tensions between Iran and world powers over Tehran's nuclear programme. Istanbul may host talks in September between Iran and EU foreign affairs chief Catherine Ashton, who represents world powers in talks.

Turkey has increased economic links with eastern neighbors and faces difficulty balancing interests if relations between Tehran and the West deteriorate further.

Ties remain fraught with former close ally Israel, after a deadly Israeli raid on a Turkish-backed aid flotilla for Gaza on May 31. Turkey says it remains committed to allies in the West, despite warm relations with neighbors Iran and Syria.

Turkey's EU membership bid [ID:nLDE66C1RI] is hobbled by an impasse over the divided island of Cyprus [ID:nLDE66J0ED], but investors do not appear alarmed as long as the government proceeds with EU-inspired reforms.

What to watch:

-- Any event that could add to concerns that Turkey's foreign policy is shifting away from the West.

-- Any signs of progress on Cyprus.

(Writing by Daren Butler, Editing by Simon Cameron-Moore and Sonya Hepinstall)