Turkish PM, cleric in war of words over graft scandal
* Erdogan sees foreign plot in arrests that hit government
* State-run Halkbank denies illegal activity in graft case
* U.S.-based cleric Gulen says Erdogan shows "decayed thinking"
By Ayla Jean Yackley and Seda Sezer
ISTANBUL, Dec 23 (Reuters) - A war of words escalated on Monday between Turkish Prime Minister Tayyip Erdogan and a cleric with powerful influence in the police and judiciary, worsening political turmoil unleashed by a corruption scandal.
Turkey has been increasingly polarised since the arrest on graft charges last week of the head of state-run lender Halkbank and the sons of two government ministers.
Erdogan answered the arrests by sacking or reassigning the Istanbul police chief and some 70 other police officers.
The scandal and the government's response have added to a febrile political atmosphere in the country, which saw unprecedented mass protests against Erdogan's rule earlier this year.
The public has been riveted by the case, with news channels showing police footage of shoeboxes stuffed with millions of euros in cash allegedly found in homes of corruption suspects.
The lira currency hovered near a record low on Monday, hammered by the domestic political tension as well as the U.S. Federal Reserve's decision to cut back monetary stimulus.
In the latest rift, the government attracted unprecedented, open condemnation from Fethullah Gulen, whose Hizmet movement claims at least a million followers, including senior police and judges, and runs schools and charities across Turkey and abroad.
Gulen, who lives in Pennsylvania, lashed out against the government on Friday by praying that "God bring fire to their houses". Erdogan shot back on Sunday with remarks that, while not naming Gulen directly, accused unnamed outsiders of "setting wicked and dark traps in our country, using their local pawns to disrupt Turkey's unity and integrity."
"We will go into (their) lairs and ... expose those organisations within the state," Erdogan said.
On Monday Gulen made clear he saw the prime minister's remarks as an attack on his movement.
"Those who call Muslims 'gangs', 'bandits', 'network' and see them as gorillas, monkeys that have taken shelter in lairs - these are nothing but a reflection of decayed thinking and no wrong can be made right with them," Gulen said in an audio recording posted on the Internet. "God sees who is in a lair."
Erdogan has won three elections in a row and has transformed Turkey by curbing the power of the secularist military establishment. Turkey has thrived economically under his leadership, but this year's protests also revealed dissatisfaction among many Turks with what some see as an authoritarian streak. A decisive break with Gulen, a former ally, adds to the array of figures lined up against him.
Cemal Usak, vice president of the Journalists and Writers Foundation, a group close to Gulen, described the movement's actions as "a civil initiative that is strongly using its right to oppose some of the measures taken by the political authority, something unseen in Turkey in recent times."
"I think the hardening of the prime minister's language is unsound. I find it inappropriate that for the first time in our political history an opinion leader has been targeted," he said.
After years of taking on top figures in the army, Erdogan's response to the corruption scandal puts him at odds with the police and the judiciary.
At the weekend the government changed regulations for police, requiring officers to report evidence, investigations, arrests and complaints to commanding officers and prosecutors.
Halkbank has drawn criticism from Western governments in the past for enabling Turkish and Indian business with Iran, which is under U.S. and EU sanctions that Erdogan disapproves of.
The bank said on Monday its conduct had been entirely lawful. In the past it had helped facilitate purchases of Iranian natural gas in return for shipments of Turkish gold, but it said it halted that practice in June, before measures that would have barred that trade took effect.
"The source of the funds used in these transactions and the parties to this trade are open, transparent and traceable in the system," Halkbank said in a stock exchange filing.
The row has weighed on the Turkish assets as investors fret the authorities could loosen fiscal policy to weather the political storm.Shares in Halkbank have lost about 20 percent of their value since news of the scandal broke on Dec. 17.
Erdogan late on Sunday accused "enemies of Turkey" of trying to sabotage Halkbank, the second-biggest government bank.
"Who are you helping to benefit by damaging this bank? The money that Halkbank has lost because of these incidents is money lost by this country," he said.