UPDATE 8-Turkish PM says tapes of talk with son a fabrication
* Erdogan's office says recordings "completely untrue"
* Leaked audio purportedly of Erdogan and his son
* Opposition calls for government to resign (Adds similar scenes in Kadikoy)
ANKARA, Feb 25 (Reuters) - Turkey's Prime Minister accused political enemies of hacking encrypted state communications to fake a phone conversation suggesting he warned his son to hide large sums of money before police raids in a graft inquiry that reached into government.
In a dramatic session of parliament after posting of an 11-minute audio tape on YouTube, Tayyip Erdogan described it as a shameless and treacherous "montage". He did not name those he held responsible but made it clear he was talking of a network run by former ally, Islamic cleric Fethullah Gulen.
The head of the main parliamentary opposition insisted the conversation was genuine, telling Erdogan: "My advice to you is either flee the country, take your helicopter, or resign."
Supporters of Erdogan, locked in a power struggle with Gulen whom he accuses of contriving a graft scandal to topple him, chanted "Tayyip, we came here to die with you", "stand tall, don't bow" and "time is on our side".
"The people don't believe these lies," Erdogan called back to loud cheers and applause from the public gallery.
Political tensions further stirred by the recordings, which Reuters could not authenticate, hit Turkish assets amid broader weakness in emerging markets.
Gulen, through his lawyer, has described the accusation of complicity in the tapes as unjust and contributing to an atmosphere of "hatred and enmity" in Turkish society.
Opinion polls taken before Monday's posting show Erdogan's popularity little affected by the corruption scandal which broke on Dec. 17 with the detention of businessmen close to him and three ministers' sons. Monday's tape will prove a further test of that resilience ahead of March local elections.
But the invective of debate could yet work in Erdogan's favour at the polls.
Erdogan took over a country in 2002 mired in political factionalism and economic crisis. Presenting the welcome face of a strong leader, he united a wide spectrum of forces, fired the economy, drove economic reform and tamed generals who had toppled four governments in the latter 20th century.
"They went and made a shameless montage and released it," Erdogan told deputies. "They are even listening to the state's encrypted telephones. That's how low they are.
"There is no allegation that we cannot answer."
The "they" cited by Erdogan was a reference to those among the followers of U.S.-based Islamic cleric Gulen he accuses of building a "parallel state" using influence in the judiciary and police. Gulen denies the accusation.
"We will reveal one-by-one the disgraces of the parallel organisation and we will make those who walk with them so embarrassed they won't be able to go onto the street," he said.
The recording is purportedly of Erdogan and his son Bilal discussing how to reduce the funds to "zero" by distributing them among several businessmen. At one point, the voice supposedly of Bilal says some 30 million euros ($40 million) remain to be disposed of.
Names of two businessmen were also mentioned.
It is not clear how encrypted telephone conversations could have been tapped on the scale the government is suggesting. The MIT intelligence organisation remains under the control of Erdogan and its head, Hakan Fidan, is a close ally.
Government officials said previous such recordings may have featured ministers' and businessmen's voices but that the conversations were put together from comments taken out of context to give the impression of impropriety.
"They have wiretapped the Prime Minister, they have wiretapped the chief of intelligence, ministers, many others. They wiretap the phone for 18 months, they listen to you, and then out of the 18 months of wiretapping they take two or three sentences," said one senior official.
Gulen's Hizmet (Service) organisation, which runs a wide network of schools, businesses and media groups, exercises strong influence in the police and judiciary. The cleric denies government accusations it drew on this network to undermine Erdogan after a political falling out between the two men.
Erdogan may remain by far Turkey's most popular politician. But the apparent conflict with Gulen and his purges of police and judiciary have cast a shadow over what Western powers long vaunted as a prime example of an effective Islamic democracy.
The main opposition Republican People's Party (CHP) played the entire recording at a parliamentary group meeting with the alleged words of Erdogan and his son displayed on a screen behind leader Kemal Kilicdaroglu head Kemal Kilicdaroglu.
"We asked sound engineers. Could these be montaged?" Kilicdaroglu said. "They said not to worry, these are all genuine. All authentic. I am calling on Erdogan to release the official records of who called whom at what time."
The formal opposition remains weak and lacking leadership, the challenge coming from Hizmet which however has repeatedly said it had no intentions to form a political party.
The tapes stirred a virtual uproar on Twitter and turned an Ankara protest against the opening of a highway into an anti-government demonstration. Riot police fired tear gas and water cannon to disperse several hundred people, mainly students who chanted "Government resign" and "Thief Tayyip Erdogan". There were similar scenes in Istanbul's Kadikoy neighbourhood.
"MOB OF LOSERS"
The recordings surfaced two days after Erdogan's AK Party began campaigning for March local elections to be followed later in the year by presidential polls that could decide Erdogan's political future after 11 years in power.
Erdogan, as in the past, suggested a broader conspiracy against Turkey including an "interest rate lobby" of financiers hostile to Turkey and "the terror lobby".
"The lobby of those who couldn't win the people's support, the mob of losers came together once more on Dec. 17. Now they are saying 'we are going to rule Turkey'."
The growing political uncertainty hit financial markets.
The lira hit two-week lows against the dollar while stocks fell three percent.
Timothy Ash, head of emerging markets research at Standard Bank, said Erdogan was likely to go further on the offensive against those he deems responsible for producing these tapes.
"This seems to be a battle to the end..The Gulenists seem to want to wound Erdogan below the waterline to undermine the AK Party's poll performance in March," Ash wrote in a note.
Social media and video-sharing sites have been awash with leaked recordings presented as evidence of wrongdoing. As with the latest recordings, Reuters has been unable to verify their authenticity. ($1 = 0.7285 euros) (Reporting by Orhan Coskun, Parisa Hafezi, Daren Butler, Ece Toksabay, Humeyra Pamuk, Ozge Ozbilgin; Writing by Ralph Boulton)