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Turkey's lira flat as banks sell forex, S-400 negotiations continue

ISTANBUL, May 14 (Reuters) - Turkey's lira was flat on Tuesday as investors weighed up reports that Ankara was evaluating Washington's proposal to delay delivery of Russian defense systems, and as state banks continued to sell dollars to support the currency.

The currency has been battered this year on worries that Ankara's push to purchase Russian S-400 missile defense systems could lead to sanctions from Washington.

A source familiar with the matter said on Monday that the United States had asked Turkey to delay the delivery, currently scheduled for July, which could lead to improvement in tense relations between the NATO allies.

In return for the delay, the United States could potentially accept Ankara's proposal to form a working group to assess how the missile systems would affect U.S. F-35 fighter jets, the source said.

A senior Turkish official said that Ankara's position had not changed and the S-400s would be delivered in July.

The lira stood at 6.0500 against the dollar at 1005 GMT, little changed from Monday's close of 6.0550.

The lira will not firm on such reports until there is more clarity on a deal between Ankara and Washington, said Jason Tuvey, senior emerging markets economist at Capital Economics.

"Developments in the global economy are dominating swings in the lira and this was set off yesterday in line with other emerging markets currencies," he said.

Separately, industrial production, seen as precursor to growth figures, fell a less-than-expected 2.2% annually in March, logging its seventh consecutive month of declines after the economy tipped into recession last year.

Month-on-month, industrial production was up 2.1% in March on a calendar and seasonally adjusted basis, data showed.

STATE BANKS

The lira is currently down nearly 13 percent against the dollar this year, with the most recent selloff sparked by the decision to re-run mayoral elections in Istanbul.

After weakening as far as 6.2460, its weakest in more than seven months, following last week's ruling by the country's electoral board, the lira recovered ground as state banks sold billions of dollars to support the currency.

Turkish state banks continuously supplied foreign currency to the market on Monday and Tuesday, traders said. Total foreign currency sales to the market on Monday amounted to $1 billion, sources told Reuters.

The government is putting pressure on all aspects of the state to try to support the lira before the Istanbul poll is re-run on June 23, Tuvey said.

"It is only so far that the banks can do this given they've already drawn down their foreign currency assets quite a lot over the past year," he said.

Last week, banks sold a total of $4.5 billion as the central bank suspended repo auctions and took additional liquidity steps. (Reporting by Ali Kucukgocmen; Editing by Catherine Evans)