lk UPDATE 1-Turkish lira hits new low as graft probe, inflation weigh
* Inflation fears, political uncertainty pressure lira
* Daily forex auction amount back down to $100 million
* Consumption tax hikes weigh on stocks
* Turkcell falls 7.49 pct on tax fine before recovering (Updates closing prices, Turkcell)
By Dasha Afanasieva
ISTANBUL, Jan 2 (Reuters) - The Turkish lira's slide to record lows picked up speed on Thursday as fears that tax hikes would fuel inflation aggravated concern about fallout from a corruption scandal.
In a surprise move, Turkey raised consumption taxes on new passenger cars, alcoholic drinks, tobacco products and mobile phones on Wednesday, which analysts estimated could add 1 percent to inflation this year.
That adds to the headaches for the central bank. It is already propping up the lira with sales of foreign currency reserves while striving to keep interest rates low to support growth.
The lira weakened to a record of 2.1885 to the dollar at 1332 GMT from 2.1500 late on Tuesday, ahead of the New Year holiday. By 1546 GMT, it was at 2.1732. Higher inflation makes the currency less profitable to hold, assuming stable interest rates.
Investors are also increasingly concerned by the lira's fall, given that Turkey's current account deficit - $52 billion in the first ten months of last year - dwarfs the roughly $40 billion analysts say the bank has in readily available reserves.
"We believe that the noted tax hikes, which can be viewed as part of the authorities' efforts to contain the wide current account deficit, will further complicate inflation dynamics," Citigroup economist Ilker Domac said in a research note.
"The combination of the CBT (central bank's) limited net foreign international reserves, the country's large external financing needs and locals' inclination to hoard forex lead us to believe that ... the CBT will have no choice but to hike rates considerably."
Fearing a hit on economic growth ahead of the polls, the central bank has so far refused to increase its main interest rates, opting instead for an unorthodox mix of dollar sales and withholding one-week repo auctions.
It sold a total of $1.2 billion in forex auctions on Monday and Tuesday to try to bolster the lira, but was due to go back to its more usual $100 million sales on Thursday and Friday.
The wide-ranging graft probe, which began with a series of dawn raids and arrests last month and has led to the resignation of three ministers and dismissal of around 70 police officers, has shaken the political establishment and rattled investors.
Foreign business interests in Turkey have been served well by the stable and economically liberal regime of Prime Minister Tayyip Erdogan, who has overseen a decade of strong development and growth.
The corruption probe has highlighted fractures within his ruling AK party, increasing the risk of a change in political direction in a cycle of elections starting this year.
"It's the sheer amount of uncertainty (that is worrying markets)," said Lars Christensen, head of emerging markets research at Danske Bank.
"The outcomes are pretty much open-ended for the first time. The collapse of the government is a risk or a weakened government under Erdogan. If this was 5 years ago market reaction would have been even stronger because the AKP was much more reformist."
Shortly after the graft scandal broke, the central bank said it would sell at least $6 billion before the end of January in support of the lira.
The market will also be watching December inflation figures, due to be released by the statistics institute on Friday.
Dragged down by car, cigarette and alcohol producers as well as retailers, the main stock index closed 1.2 percent down at 66,985.82 points, underperforming the main emerging market index which was down 1.1 percent.
Shares in Turkey's leading mobile phone company Turkcell tumbled 7.49 percent after it said it faced a tax demand and fine totalling 527.7 million lira ($245.64 million) before recovering and ending the day down 1.32 percent.
The yield on Turkey's 10-year benchmark bond ended the day at 10.62 percent compared with 10.41 percent on Tuesday. ($1 = 2.1483 Turkish liras) (Editing by xxx)
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