The timing of the shake-up, on Christmas Day, cushioned the blow to Turkey on dormant international markets. But the stock index closed 4.2 percent and the lira weakened to 2.0862 against the dollar.
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During his three terms in office, Erdogan has transformed Turkey by tackling its once-dominant secular military and overseen rapid economic expansion. He appeared unfazed by the resignations and the gauntlet thrown down by Bayraktar, which set off fresh demonstrations in Ankara, Istanbul and Izmir.
In a speech, Erdogan said he would not tolerate corruption. But, having responded to the Dec. 17 graft arrests by sacking or reassigning around 70 of the police officers involved, he argued that their work had been deeply tainted.
"If a verdict is made by the opposition party on the second day of the investigation, what's the point of having judges? If a decision is made by the media, what's the point of having these long legal procedures?" Erdogan told provincial leaders of his Islamist-rooted AK party.
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Alluding to TV news reports which have riveted Turks with footage of cash-filled shoeboxes allegedly seized at suspects' homes, he asked: "How do you know what that money is for?"
The 14-month investigation was conducted largely in secret. At the weekend, the government changed regulations for the police, requiring officers to report evidence, investigations, arrests and complaints to commanding officers and prosecutors. Journalists have also been banned from police stations.
Hurriyet newspaper said up to 550 police officers, including senior commanders, had been dismissed nationwide in the past week by Interior Minister Muammer Guler, who has now resigned.