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Turkey under pressure to solve political deadlock

The political and social instability rocking Turkey needs to be resolved quickly and the political vacuum in the country filled if it is to prosper, analysts have warned.

Turkey has been rocked by a series of terrorist attacks over the past few days following the country's decision to launch air raids against terrorist organization Islamic State and Kurdish separatists. All this is happening against a background of political uncertainty.

The leaders of Turkey's main political parties appear confident they can form a coalition government this week after months of protracted talks.

Turkey's ruling Justice and Development Party (the AKP) and the main opposition Republican People's Party (CHP) will make a final decision this week on whether to form a coalition government, according to various media reports.

Party officials said the leaders of both parties would meet again on Thursday or Friday to make a decision on forming a coalition.

The parties have until August 23 to agree to a working coalition, otherwise President Recep Tayyip Erdogan could call a fresh election, which could happen in the fall.

Both parties are eager to avoid new elections and a CHP spokesman told reporters in Ankara on Monday evening, after four hours of talks between the party leaders, that "the two leaders made various evaluations in the broadest spectrum in a move not to leave the country without a government."

The talks come after inconclusive elections in Turkey in June in which the ruling AK party lost its parliamentary majority in the face of the mounting opposition from nationalist and pro-Kurdish parties.

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However, Lubomir Mitov, chief economist for Central and Eastern Europe at UniCredit, told CNBC that there was a 50 percent chance of an agreement being reached but that time was running out.

"As time goes on it seems that the chance is really diminishing," he told CNBC Europe's "Squawk Box" Tuesday. Mitov said that as well as remaining differences between the CHP and AKP.

Blue Mosque Istanbul Turkey
Rene Mattes | Getty Images

"There are a set of core issues (between the two parties which I don't see how they are going to reach an agreement- and these are mostly related to Mr Erdogan's aspirations and how to proceed with these corruption charges."

"They have red lines on each side and they seem to have not crossed these," he added.

The AK party, founded by controversial President Erdogan, has also been beset by allegations of corruption and claims that it has become increasingly authoritarian.

Adding to the complications were internal differences between Erdogan and Turkish Prime Minister Ahmet Davutoglu, (the leader of the AK party) over the direction of the party, Mitov said.

Rising violence

The political instability comes at a time when Turkey is increasingly vulnerable to attack from the terrorist group called Islamic State after it entered a western alliance conducting air strikes on the group in Iraq and Syria.

There has also been a sharp spike in violence between the Turkish military and militants within the Kurdish Worker's Party (PKK) with a ceasefire between the sides called off after Turkey also conducted airstrikes on PKK positions, despite the PKK militants also fighting against Islamic State in Syria and northern Iraq.

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Reflecting the rising tension between the Turkish security forces and Kurdish militants, on Monday, six members of the Turkish security forces were killed in separate attacks across the country.

Ege Seçkin, country risk analyst at IHS, told CNBC's Worldwide Exchange on Tuesday that the ruling AK party could try to take advantage of the tensions.

"I think there is definitely a connection between the intensification of fighting in Turkey and the situation on the political scene," he said. "It might be the case that the ruling party, the AKP, is calculating that with its renewed offensive against the PKK and the Islamic State, for that matter, it stands to increase its votes in a potential snap election which would be likely to come later this year."

Turkey's confrontations with external forces is likely to distract from the country's economic woes too. The once booming economy that grew 9.2 percent in 2010 is now forecast to grow by 3.7 percent by the European Commission.

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Seçkin said that the fighting was impacting investor sentiment and that Turkey needed stability and structural reforms.

"One of the biggest problems in Turkey is that it has a chronic current account deficit and this renders the economy vulnerable to political instability as well as violent events in the country and we've seen this in the recent volatility in the lira in the last few weeks. (With) the potential for renewed elections now, this is likely to increase."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld