* Profit taking sees stocks ease from close to record-high
* Lira, bonds strengthen
* Fears of tension ease on public support for reforms
ISTANBUL, March 26 (Reuters) - Turkish shares retreated slightly on Friday from their highest level since late 2007 as investors locked in profits, while the lira and bonds strengthened on a wave of strong sentiment on Turkey. By 0836 GMT the main Istanbul share index .XU100 was down 0.6 percent at 56,739.06 points, underperforming the MSCI index of emerging markets .MSCIEF which was up 0.25 percent.
Turkish stocks, which doubled in value in 2009, are just 3.4 percent weaker than their all-time peak in October 2007.
Bond prices continued a mini-rally, with the yield on the benchmark Nov. 16, 2011, bond <0#TRTSYSUM=IS> falling to 8.86 percent from a previous 8.93 percent.
Fears of higher inflation in Turkey had pushed the yield well above 9 percent earlier this month, but a more positive outlook on international markets and improving investor mood, particularly towards emerging markets, has seen bonds strengthen.
The lira IYIX= also gained, trading at 1.5320 to the dollar, compared with a previous close of 1.5380.
Demand for Turkey’s favoured banks, which account for more than half of the main index, easing political worries and big inflows from less-favoured emerging markets or troubled sovereigns such as Portugal have all boosted Turkey this week.
“We may see the Istanbul stock exchange move in tandem with global markets and some profit realisations,” Tera Securities said in a research note, adding the index had broken a strong resistance zone of around 56,000 points.
“Expectations of a continued low interest rate environment for an “extended period” in both domestic and global economies have been keeping liquidity-driven motives in the market alive,” Tera added.
Banking stocks, which led the market rally on Thursday, were flat but top-traded Garanti Bank (GARAN.IS) rose 0.7 percent.
The announcement of sizeable new syndication loans for Turkish banks has helped ease roll-over risk for the sector, and news that General Electric has received non-binding bids for its 20.85 percent stake in Garanti continued to provide support, analysts said.
Turkish assets had been hit this month on concerns about a dispute between the government and judiciary over constitutional reform.
The government wants to amend the constitution to introduce more control over the appointment of judges and prosecutors, a move it says is necessary to meet European Union membership criteria. It has said it will submit its reform draft to parliament before the end of the month.
Critics of the government say the reforms are aimed at consolidating the AK Party’s power and weakening the control of its secularist foes at the judiciary.
The party lacks enough votes in parliament to amend the constitution outright, so the proposed amendments would likely face a public referendum.
However fears of tension have eased as polls have showed that the government would find support for its reforms in any referendum. (Reporting by Alexandra Hudson; Editing by Susan Fenton)