UPDATE 2-Risks abound but Turkish economy picks up pace in Q2
* Growth of 4.4 percent exceeds 3.5 percent poll forecast
* Full-year growth seen just below 4 percent official target
* 2.1 pct quarterly expansion, Q1 revised down to 2.9 pct y/y
* Shares rise 1.5 percent, lira and bonds weaker
ISTANBUL, Sept 10 (Reuters) - Turkey's economy expanded more than expected in the second quarter, with strong domestic demand offsetting a huge trade shortfall, but ministers said 2013 growth would be below the government's official 4 percent target.
The country of 75 million which straddles Asia and Europe is struggling along with other major emerging economies with the financial effects of the prospective withdrawal of U.S. monetary stimulus.
Tuesday's figures showed on growth alone it is doing better than most, notably neighbour Russia, and is still expanding twice as fast as last year. Output grew 4.4 percent year-on-year in the second quarter beating a Reuters poll forecast of 3.5 percent.
But the structure of the expansion continues to worry economists and policymakers, with an almost $60 billion current account gap due to huge fuel imports making Turkey exposed to swings in global money flows and oil prices.
Imports grew almost 12 percent compared to a 1.2 percent rise in exports and analysts calculated the negative balance knocked three percentage points off second quarter growth.
"The bad news is that the data does not show much evidence of rebalancing," said Timothy Ash, head of emerging market research at Standard Bank.
"Net exports were ... heavily negative, and suggest a continued vulnerability via the current account/external financing channel."
As the U.S. Federal Reserve gets closer to a first reduction in the bond-buying that has flooded developing economies with investment since 2008, the current account gap has made Turkey's lira one of the most high-profile sufferers, down 13 percent since early May.
In a complicated policy mix, the central bank is hoping to support a return to the higher growth rates Turkey achieved in 2010-11, ruling out for now further interest rate rises to defend the currency and fend off the resulting inflation.
"Monetary policy is too loose in my mind still," Ash said. "Especially against a backdrop of much tighter global liquidity conditions."
GDP expanded 2.1 percent from the previous quarter when adjusted for seasonal and calendar effects, the Turkish Statistics Institute said. First-quarter growth was revised to 2.9 percent from an initial 3 percent.
GROWTH SEEN BELOW 4 PCT
The government is officially expecting growth of 4 percent this year and 5 percent next, but ministers have talked down the outlook for 2013. Economy Minister Zafer Caglayan said 2013 growth would be slightly below 4 percent but above 3.5 percent.
"Foreign economic developments will begin to affect our growth in the third quarter. We do not expect their impact to be very deep but we will be affected by them in the second half of 2013 and maybe at the start of 2014," he said in a statement.
The lira weakened to 2.0348 from 2.0280 on Monday and the 10-year benchmark bond yield rose to 9.92 percent from 9.82 percent on Monday. The numbers appeared to support Istanbul shares, which rose 1.5 percent.
"Domestic demand and government spending drove growth, supported by an increase in stocks (inventory)," said Haluk Burumcekci, an economist at Burgan Securities.
"When we evaluate this data with initial data from the third quarter, we can say economic activity has slowed down to a limited extent compared to the first half," Burumcekci said.
The central bank raised interest rates in the early part of 2012 to stop the current account deficit getting out of control on the back of credit-fuelled domestic demand.
But with the economy expanding just 2.2 percent last year compared to around 9 percent in 2010 and 2011, and an election cycle beginning next March, pressure to maintain growth is intense.
A possible U.S. intervention in Syria, which shares a 900 km (560 mile) border with Turkey, could push oil prices higher, upping Turkey's import bill and complicating matters further.
"On the back of the above data it is difficult for the central bank to justify running negative real interest rates," said Ash. "Especially when the current account deficit is huge and inflation is running well above target still."