Wires

UPDATE 2-Turkish lira rebounds from sharp selloff after regulator steps in

Nevzat Devranoglu and Daren Butler

* Banking regulator cuts limit on forex swap transactions

* Lira weakened to lowest level since May on Friday

* Lira volatility spikes after broad decline since May (Adds unemployment, stocks)

ISTANBUL, Feb 10 (Reuters) - The Turkish lira rebounded in volatile trade on Monday to below 6 against the dollar, erasing much of Friday's sharp losses, after a bank regulator announced new limits on foreign-exchange transactions.

Investors and traders said the currency's abrupt selloff and recovery, after weeks in a narrow range, suggested Turkish state banks were again intervening to buffer the lira after they sold tens of billions of dollars over the past year.

The BDDK bank regulator on Sunday cut the limit for Turkish banks' forex swap, spot and forward transactions with foreign entities to 10% of their equity, from a 25% ceiling set in August 2018 during the worst of Turkey's currency crisis.

The lira strengthened to as low as 5.975 against the dollar and was worth 5.9955 at 0817 GMT.

It had tumbled to 6.05 on Friday, its weakest level in regular trading since May, as a late-week rally in the dollar prompted a selloff across emerging markets.

"The (BDDK) move is another step towards avoiding potential FX rate volatility and to shore up reserves," Yatirim Finansman said in a note to clients. A treasury desk trader at a Turkish bank said the move supported the lira on Monday.

The currency's one-month implied volatility spiked on Friday and Monday to its highest level since mid-January. A week earlier, it touched its lowest level since mid-2013 after a broad downward trend since May of 2019.

The BDDK's new FX limits are one of a series of government steps taken to stabilise the currency after the 2018 crisis cut its value by 36% in two years and tipped Turkey's economy into recession.

While economic growth rebounded in the fourth quarter of last year, official data on Monday showed that unemployment remained elevated at 13.3%, down from 13.4% a month earlier.

The overnight lira swap rate jumped to its highest level since April of 2019, at 39% in London, up from 9.5% on Friday.

Istanbul's main stock index was off 0.1% with the banks sector down 0.5% after the BDDK separately reduced fees lenders can charge clients, squeezing a key source of income.

Friday's lira weakness also came after the treasury minister suggested Turkey's central bank could continue cutting rates, and as the Turkish military girded for more confrontation in Syria's Idlib region.

"Trading volumes look significantly larger than usual which is suspicious of (state bank) interventions, and which then feeds suspicions that we might have done better recently than we perhaps should have," said Koon Chow, an EM macro and FX strategist at UBP.

(Additional reporting by Marc Jones and Karin Strohecker in London; Editing by Jonathan Spicer and Alison Williams)