(Adds comment, updates exchange rate)
ISTANBUL, May 23 (Reuters) - The Turkish lira tumbled five percent against the dollar on Wednesday, accelerating a sell-off in which the currency has lost a fifth of its value this year as investors fret over monetary policy under President Tayyip Erdogan.
Erdogan faces elections next month and has said he expects to assert greater control over interest rate policy after the vote, deepening concern about the Turkish central bank's ability to rein in double-digit inflation.
Erdogan and his Islamist-rooted AK Party have ruled Turkey for 15 years, overseeing rapid economic growth. But his entrenched opposition to raising interest rates to tackle rising prices, which he repeated to bankers in London last week, has alarmed investors.
"Markets used to perceive the dominance of Erdogan and the AK as a source of stability. This is patently no longer the case," said Nicholas Spiro, a partner at Lauressa Advisory.
After hitting a new record low, the lira recovered some ground to trade down around four percent on the day.
Wednesday's fall, exacerbated by stop-loss selling by Japanese retail investors overnight, puts the lira on track for its worst monthly performance since the 2008 financial crisis.
The sell-off has also increased expectations that the central bank's Monetary Policy Committee (MPC) may be forced to raise interest rates before its next scheduled policy-setting meeting on June 7, as it has done in previous years.
"We expect the MPC to hold an interim meeting over the coming days to raise interest rates by at least 200bp," Jason Tuvey of Capital Economics said in a note to clients.
"If policymakers refrain from tightening monetary policy, the risk of a disorderly adjustment and a sharp economic downturn (possibly recession) will mount."
The lira was at 4.8722 to the dollar at 1515 GMT from its close of 4.6746 on Tuesday. It earlier touched a record low of 4.9290. It also fell against the yen, amid talk Japanese retail investors were selling the lira as it hit stop-loss levels.
Economy Minister Nihat Zeybekci described the exchange rate as "abnormal," adding that Turkish institutions had the tools available and should do what was necessary without delay.
Government spokesman Bekir Bozdag said a game was being played with the lira, but it would not affect next month's presidential and parliamentary elections. Neither Erdogan nor the central bank commented on Wednesday's fall.
"We are bearish on the lira and always have been, given its very weak external balances and with macroeconomic policy moving in the wrong direction as well," said Kiran Kowshik, emerging markets forex strategist at UniCredit.
A self-described "enemy of interest rates," Erdogan wants borrowing costs lowered to spur credit growth and construction, and he said last week he would seek greater control over monetary policy after elections set for June 24.
"Erdogan made a choice between letting the currency go and... hiking rates and for his particular political calculation he opted to let the currency go," said Tim Ash at BlueBay Asset Management
Officials told Reuters the government's economic management team met at the start of this week to discuss potential measures, including possible steps by the central bank. Deputy Prime Minister Mehmet Simsek and central bank Governor Murat Cetinkaya attended the meeting.
Credit ratings agencies sounded the alarm about monetary policy. S&P Global senior sovereign analyst Frank Gill told Reuters that government finances could deteriorate rapidly if authorities failed to stem pressure on the currency and government borrowing costs .
Investors want to see decisive rate increases to curb double-digit inflation, and Erdogan's comments have reinforced long-standing worries about the central bank's ability to do that.
Borsa Istanbul Group, the Istanbul stock exchange company, said in a statement on Wednesday it had converted its foreign currency assets into lira, aside from its short-term needs, in a step to support the Turkish currency.
The lira's weakness was exacerbated by dollar gains against a basket of currencies, with investors awaiting the minutes of the U.S. Federal Reserve's last policy meeting for hints on the pace of monetary tightening.
The yield on the benchmark 10-year bond shot up to 15.87 percent at the opening from a last trade of 14.92 percent on Tuesday, before easing back to 14.27 percent.
The main BIST 100 share index fell 0.22 percent to 103,105 points on Tuesday. (Additional reporting by Orhan Coskun and Claire Milhench; writing by Daren Butler and David Dolan; editing by Larry King and David Stamp)