UPDATE 1-Turkish yields at new low ahead of rates meeting

* Bond yields reach record low

* Eyes are on Thursday's interest rate decision

* Stocks weaken as budget deficit grows

(Updates yield, adds share moves, quptes)

By Thomas Grove and Ayla Jean Yackley

ISTANBUL Sept 15 (Reuters) - Turkish debt yields reached an all-time low on Tuesday ahead of the central bank's meeting on later this week at which it is expected to reduce its benchmark interest rate to a new record low.

Stocks, however, underperformed emerging-market peers after weaker-than-expected budget data for July and August heightened investor concerns about Turkey's financing needs.

The busiest May 11, 2010, bond <0#TRTSYSUM=IS> yielded 9.21 percent at 0905 GMT from a previous close of 9.37 percent as investors eyed the upcoming rate-setting meeting.

"The central bank's underlying dovishness is expected to continue in the coming months," said Luis Costa, emerging debt strategist at Commerzbank in London. "We might eventually see the yield falling below the 9 percent threshold, depending on how the upcoming economic indicators look."

A Reuters poll of 20 economists forecast the central bank's monetary-policy committee will cut its benchmark borrowing rate by 50 basis points (bps) to 7.25 percent at its monthly meeting on Thursday, bringing the total easing since November to 950 bps.

"Right now 50 basis points is everyone's consensus. If they deviate from that, that would be interesting and their tone for the future will be interesting as well," said Tunc Yildirim of Dundas Unlu.

The lira IYIX= firmed to 1.489 against the dollar from the previous day's close of 1.503.

BUDGET DATA DISAPPOINTS

The ISE National 100 share index fell 1.32 percent to close the morning session at 45,877.8, while other emerging market stocks .MSCIEF rose 0.59 percent, after the government posted budget deficits of 6.6 billion lira in July and 1.5 billion lira in August.

"These figures are very bad. This is the worst year in seven years, and the market has stopped believing that the government has the power to cut the budget deficit anytime soon," said Mukrim Hatipoglu, portfolio manager at Info Invest.

"If there were an IMF deal markets could look forward to, that would bring some relief, but now investors are worried."

Turkey has been in talks with the International Monetary Fund for more a year to secure needed funds to cover its foreign financing needs. Its last deal with the IMF expired in May 2008.

Banks account for some 40 percent of the bourse's weighting and act as a bellwether for Turkish stocks. The banking index .XBANK declined 1.8 percent.

Top-traded Isbank (ISCTR.IS), Turkey's biggest listed bank, dropped 3.6 percent to 5.35 lira, and Garanti Bank (GARAN.IS), the second-biggest, fell 2.7 percent to 5.40 lira.

The biggest mover was cement maker Afyon Cimento (AFYON.IS), which jumped 10 percent to 880 lira after it said it would increase its capital 25-fold to 3 million lira in a bonus rights issue, according to a company filing.

Other cement companies also gained on positive sentiment about the sector, which has lifted exports and is expected to issue large dividends, said Ece Mandaci, analyst at Oyak Invest.

Lafarge Aslan (ASLAN.IS) climbed 6.9 percent to 62 lira, and Mardin Cimento MARDIN.IS rose 5.59 percent to 7.55 lira.

Aselsan (ASELS.IS), a defence contractor, gained 1.72 percent to 5.90 lira. It said in a filing it had signed a research-and-development contract worth 45 million lira with the state Defence Industry Undersecretariat. (Additional reporting by Ebru Tuncay; editing by Chris Pizzey)