UPDATE 4-Turkish lira hits record low against dollar on strains in U.S. ties

* Lira weakens some 17 percent since September

* Bond yields up nearly 200 basis points in same period

* Deteriorating U.S. ties, monetary policy worries drive losses (Adds Simsek, banks)

ISTANBUL, Nov 21 (Reuters) - The Turkish lira hit a record low of 3.9780 against the dollar on Tuesday, accelerating losses to some 17 percent since September as concerns widened over Turkey's strained relations with the United States and the independence of its central bank.

The bank, which is trying to balance the task of containing double-digit inflation with President Tayyip Erdogan's demands for lower interest rates, responded with emergency measures to tighten policy, although that failed to reverse the slide.

The lira's plunge has helped fuel inflation by driving up the cost of energy and other imports. Turkey imports almost all of its energy needs.

Worries about U.S. ties center around the trial of Turkish gold trader Reza Zarrab, who is accused of violating U.S. sanctions on Iran. The Turkish government spokesman on Monday described the case as a "clear plot against Turkey" that lacks any legal basis.

Foreign investors, needed by Turkey to finance its large budget and current account deficits, also have deep concerns about political pressure on the central bank. Erdogan, who wants lower interest rates to fuel lending and construction, said last week a lack of government intervention in policy had left Turkey saddled with high inflation.

"Turkey and the U.S. have historically had close ties, but if you look at the events over the past months ... it suggests that relations are deteriorating, and that's certainly a big concern for investors," said William Jackson of Capital Economics in London.

The currency fell as far as 3.9780 to the dollar, eclipsing a previous low of 3.9417 set in January. It was at 3.9575 at 1417 GMT, after the central bank's measures. Against the euro, the currency of some of Turkey's major trading partners, it touched a record low of 4.6711.

The lira's slide has been accompanied by a jump of nearly 200 basis points in short-term government debt yields since September, a relatively buoyant period for other emerging markets and global equities.

Istanbul's index of banking stocks fell 0.5 percent, underperforming a 0.4 percent rise in the benchmark BIST 100 index, reflecting the concerns about potential fall-out from the Zarrab case.


U.S. authorities have charged Zarrab, Mehmet Hakan Atilla, an executive at Turkey's state-owned Halkbank, and seven other alleged co-conspirators with handling hundreds of millions of dollars for Iran's government and Iranian entities from 2010 to 2015, in a scheme to avoid U.S. sanctions.

Both Zarrab and Atilla are in U.S. custody and have pleaded not guilty. The trial was due to start in New York on Nov.27, although it has since been delayed by a week.

Halkbank said all its transactions have fully complied with national and international regulations. Turkey's banking regulator last month dismissed as untrue a local media report alleging banks faced billions of dollars of fines from the United States over Iran sanctions.

But investors remain wary. Bank shares have fallen 10 percent since late October, underperforming a 3 percent drop in the benchmark index.

Ankara says the Zarrab case is based on fabricated documents. Under a previous investigation that became public in 2013, Turkish prosecutors accused Zarrab and high-ranking Turkish officials of involvement in facilitating Iranian money transfers via gold smuggling, leaked documents at the time showed.

Erdogan, then prime minister, cast that investigation as a coup attempt orchestrated by his political enemies. Several prosecutors were removed from the case, police investigators were reassigned, and the investigation was later dropped.

Erdogan, who has not been accused of any wrongdoing, has said U.S. prosecutors have shown "ulterior motives" by including references to him and his wife in court papers relating to the trial in New York.


The central bank said it would remove banks' borrowing limits on the interbank money market for overnight transactions, and increase their limit for the intraday liquidity facility -- both moves designed to shore up the currency.

An official from the bank said the weighted average cost of funding would be increased to 12.25 percent on Wednesday, up from 11.99 percent on Monday.

But Jackson of Capital Economics said such moves fell far short of the outright interest rate increase that markets want to see.

"This tweaking at the edges has put the spotlight back onto the fact that the central bank may be facing political pressure not to raise interest rates, not to undertake a conventional response to currency weakness," he said.

(Additional reporting by David Dolan; Writing by Daren Butler and David Dolan; Editing by Dominic Evans and Gareth Jones)