ISTANBUL (Reuters) - The Turkish lira continued to firm on Thursday in the wake of central bank action to stabilize markets, although gains were limited by uncertainty about the effectiveness of the ruling AK Party's bid to quell anti-government protests.
Turkish markets have been hit over the last two weeks as question marks over the outlook for U.S. Federal Reserve money-printing coincided with protests across Turkey, with the lira hitting its weakest level against its euro/dollar basket since October 2011 earlier this week.
This prompted the central bank to support the lira with currency auctions on Tuesday. It also said it planned to take extra short-term policy-tightening steps.
"The central bank's aggressive tightening for one day and limited FX sales seem to have been enough to calm the mood on the lira and lead the lira basket down," said Erkin Isik, a strategist at TEB-BNP Paribas.
"The lira started to reverse its recent underperformance and in the last two days outperformed emerging markets by 1.2 percent."
The lira has recovered against its currency basket and was trading at 2.1716 by 1450 GMT (10.50 a.m. ET), up from 2.1830 on Wednesday afternoon.
Against the dollar, it firmed to 1.8661 from 1.8755 late on Wednesday.
The deputy chairman of the ruling AK Party offered a referendum on the redevelopment plans for the Istanbul square that first stirred the unrest, although protesters have so far yet to leave the location.
"We do not expect the protest movement to call an end to Gezi Park occupation on a vague signal of a referendum," said Inan Demir, an economist at Finansbank.
"Yet the more compromising attitude from the government might help ease the acute domestic political pressure on lira-denominated assets and allow them to behave more in line with emerging market peers."
Turkey's two-year benchmark bond yield fell to 6.74 percent after closing at 6.80 percent on Wednesday.
Shares closed down 0.51 percent at 76,488.60 points, less than the 1 percent fall in MSCI's broad emerging market benchmark index.
(Reporting by Seda Sezer; Editing by Toby Chopra)