* Lira recovers from initial losses
* Shares up, bonds flat
(Adds quotes, updates prices)
By Seltem Iyigun
ISTANBUL, Oct 10 (Reuters) - Turkish shares hit theirhighest level this year on Wednesday and the lira bounced off aone-month low after Fitch said Turkey was making good progressin dealing with the financial crisis.
Late in August, the ratings agency said it may raiseTurkey's long-term rating to investment grade if it makesprogress towards its potential growth rate, trims inflation toits target rate and narrows the current account gap to a moresustainable level.
"We will be looking at it again quite soon. Regulatoryissues mean we have to look again every year so we are quiteclose to that," Fitch head of Emerging Europe Sovereigns, PaulRawkins, told a conference in London.
"What we're really looking for is whether Turkey has managedto steer its way to a soft landing. So far the evidence is good,they ticked a lot of boxes... The issues are it's still a veryvolatile economy," he said in a presentation.
Fitch rates Turkey's creditworthiness at BB+ with a stableoutlook, one notch below investment grade.
Analysts said Fitch was the closest among rating agencies tolift Turkey to investment grade.
"Fitch's remarks are quite positive, and it already israting Turkey with the highest grade among the ratings agencies,although still below investment grade," said the forex chief ofan Istanbul-based bank.
By 1519 GMT, the lira was at 1.8165 against the dollar, slightly stronger than 1.8180 late on Tuesday. Inearly trade it touched 1.8265, its weakest level since Sept. 5.
"The fact that Fitch said it was close to reviewing Turkey'scredit rating boosted the lira. We expect Fitch to review it inNovember. I don't think there will be a ratings upgrade but justan upgrade of the outlook," said Tufan Comert, strategist atGaranti Securities.
"We don't expect the lira to depreciate excessively in theupcoming period due to the high forex liquidity in the localmarket and the effectiveness of the central bank's liquiditymanagement tools," Comert said.
Tighter monetary policy by the central bank in the lastquarter of 2011 and the start of 2012 helped steer Turkey'seconomy softly down as growth slows, narrowing its large currentaccount deficit and bringing down inflation.
The International Monetary Fund said on Monday it expectedTurkey, Europe's fastest-growing economy last year with growthof 8.5 percent, to expand at a "more measured pace" of 3 percentin 2012 despite weak growth in the European Union, its maintrading partner.
Turkey's main share index closed 0.56 percent up at68,457 points, outperforming a 0.33 percent fall in the emergingmarkets index .
"Fitch remarks supported the index, and interest in thebanking shares helped it to a year-high. We may observe furtherupward trend for the stock exchange," said Alper Ozdamar, ananalyst at Garanti Securities.
Turkey's banking index climbed 1.14 percent. The yield on Turkey's two-year benchmark bond was flat at 7.63 percent.
(Additional reporting by Carolyn Cohn and Ece Toksabay; Editingby Nick Tattersall and Toby Chopra)
Keywords: MARKETS TURKEY/