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UPDATE 1-Turkish lira pares losses as PM adviser calms markets

Thursday, 4 Oct 2012 | 4:36 AM ET

* Prime minister's advisor comments relieve markets

* Lira pares earlier losses, yields up

* Shares in Aselsan rise on political tensions

(Adds quotes, stocks, details)

By Seltem Iyigun

ISTANBUL, Oct 4 (Reuters) - The Turkish lira partially pared its losses on Thursday after an advisor to Prime Minister Tayyip Erdogan said Turkey had no interest in a war in Syria, easing investors' anxiety over increasing tension between two countries.

Turkish bonds and shares however were still trading down further on Thursday.

Sentiment on Turkish assets deteriorated after Turkish artillery hit targets near the Syrian border late on Wednesday and early on Thursday in response to a mortar bomb fired from Syria which killed five Turkish civilians.

But the lira partially rebounded on Thursday in response to comments by Ibrahim Kalin, a senior adviser to Prime Minister Tayyip Erdogan.

"Turkey has no interest in a war with Syria. But Turkey is capable of protecting its borders and will retaliate when necessary," Kalin said on his Twitter account.

"Political, diplomatic initiatives will continue," he said.

By 0719 GMT, the lira stood at 1.8005 against the dollar , after touching its weakest since mid-September of 1.8085, from 1.7966 late on Wednesday.

"Investors have started to buy lira after the first reaction. The comment from the prime minister's advisor also eased tensions in the market," said Erkin Isik, strategist at TEB.

Investors are now eyeing the outcome of a vote in Turkish parliament on extending a five-year-old authorisation for foreign military operations, an agreement originally intended to allow strikes on Kurdish militant bases in northern Iraq, but which could be extended to include Syria.

The yield on the two-year benchmark bond stood at 7.68 percent, after closing at 7.58 percent on Wednesday.

Traders said yields were up due to political tensions and the intraday trend would depend on the parliament's decision.

"If parliament approves an extensive operation across border, then the yields would rise further," said a fixed-income trader in Istanbul.

The main share index was 0.42 percent down to 66,532 points, underperforming a rise of 0.3 percent in the MSCI emerging markets index .

Shares in Turkish defence and electronics company Aselsan

were 3.25 percent up at 6.98 lira.

"Aselsan is a company which operates in defence sector. When there is political tension, we always see investors buying Aselsan shares," said Isik Okte, strategist at Halk Invest.

(Writing by Seltem Iyigun; Editing by Nick Tattersall and Jon Hemming)

((seltem.iyigun@thomsonreuters.com)(+90 212 350 7062)(Reuters Messaging: seltem.iyigun@thomsonreuters.com))

Keywords: TURKEY/MARKETS