UPDATE 1-Turkish lira weakens again as U.S. Senate passes tough measures

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ISTANBUL, Dec 18 (Reuters) - The Turkish lira hit its weakest level against the dollar in more than two months on Wednesday after the U.S. Senate passed legislation with provisions to punish Ankara, raising concerns about already strained ties with Washington.

The lira has lost more than 11% this year after a currency crisis chopped its value by 30% last year. The currency weakened to 5.9090 by 0734 GMT from a close of 5.8880 on Tuesday, and was on track for its fourth straight down day.

Ties with the United States have been troubled by policy differences in Syria and Turkey’s purchase of Russian S-400 missile defence systems, which prompted Washington to move towards imposing sanctions.

The Senate’s $738-billion defence spending bill calls on U.S. President Donald Trump to sanction Turkey, prohibits the delivery of F-35 jets to the NATO ally over the S-400 purchases and allows for the lifting of an arms embargo on Cyprus.

In response, the Turkish foreign ministry said Congress was adopting an irrational, hostile attitude toward Turkey and that the language of threats will not stop Ankara taking steps to ensure its national security.

The lira is “not liking all this flux in the U.S.-Turkey relationship (and) the sense I think in markets is that sanctions are still coming down the pipe on Turkey from Congress,” said Tim Ash of BlueBay Asset Management.

The main Istanbul share index fell 0.45% in early trade. The yield on the benchmark 10-year bond fell to 12.44% on Tuesday from 12.52% on Monday.

Turkish President Tayyip Erdogan and Trump have both spoken of a special rapport between them and U.S. lawmakers have criticised their president for what they see as his shielding Turkey from sanctions.

On Tuesday, the Trump administration refrained from endorsing a resolution passed by the Senate recognizing as a genocide the mass killings of Armenians a century ago.

The rise in tensions with Washington comes as investors also weigh up the impact of narrowing real interest rates, which have fallen below levels in most peer emerging markets after a series of Turkish rate cuts.

Since only July, the central bank has halved its policy rate to 12% to boost the recovery from a recession brought on by the currency crisis. Given that annual inflation stood at 10.6% in November, the real rate stands at about 1.4%.

In a “flash crash” in Asia in late August, the lira plunged to 6.47 against the dollar. Aside from that, the lira was approaching the levels of around 6 against the dollar which it last hit in late May.

The U.S. Federal Reserve’s decision last week to halt rate cuts could put the lira and other EM currencies under pressure.

Reporting by Daren Butler; Editing by Jonathan Spicer