UPDATE 1-Turkish shares hit 2012 high on Fitch comment

* Lira recovers from initial losses

* Shares up, bonds flat

(Adds quotes, updates prices)

By Seltem Iyigun

ISTANBUL, Oct 10 (Reuters) - Turkish shares hit their highest level this year on Wednesday and the lira bounced off a one-month low after Fitch said Turkey was making good progress in dealing with the financial crisis.

Late in August, the ratings agency said it may raise Turkey's long-term rating to investment grade if it makes progress towards its potential growth rate, trims inflation to its target rate and narrows the current account gap to a more sustainable level.

"We will be looking at it again quite soon. Regulatory issues mean we have to look again every year so we are quite close to that," Fitch head of Emerging Europe Sovereigns, Paul Rawkins, told a conference in London.

"What we're really looking for is whether Turkey has managed to steer its way to a soft landing. So far the evidence is good, they ticked a lot of boxes... The issues are it's still a very volatile economy," he said in a presentation.

Fitch rates Turkey's creditworthiness at BB+ with a stable outlook, one notch below investment grade.

Analysts said Fitch was the closest among rating agencies to lift Turkey to investment grade.

"Fitch's remarks are quite positive, and it already is rating Turkey with the highest grade among the ratings agencies, although still below investment grade," said the forex chief of an Istanbul-based bank.

By 1519 GMT, the lira was at 1.8165 against the dollar , slightly stronger than 1.8180 late on Tuesday. In early trade it touched 1.8265, its weakest level since Sept. 5.

"The fact that Fitch said it was close to reviewing Turkey's credit rating boosted the lira. We expect Fitch to review it in November. I don't think there will be a ratings upgrade but just an upgrade of the outlook," said Tufan Comert, strategist at Garanti Securities.

"We don't expect the lira to depreciate excessively in the upcoming period due to the high forex liquidity in the local market and the effectiveness of the central bank's liquidity management tools," Comert said.

Tighter monetary policy by the central bank in the last quarter of 2011 and the start of 2012 helped steer Turkey's economy softly down as growth slows, narrowing its large current account deficit and bringing down inflation.

The International Monetary Fund said on Monday it expected Turkey, Europe's fastest-growing economy last year with growth of 8.5 percent, to expand at a "more measured pace" of 3 percent in 2012 despite weak growth in the European Union, its main trading partner.

Turkey's main share index closed 0.56 percent up at 68,457 points, outperforming a 0.33 percent fall in the emerging markets index .

"Fitch remarks supported the index, and interest in the banking shares helped it to a year-high. We may observe further upward trend for the stock exchange," said Alper Ozdamar, an analyst at Garanti Securities.

Turkey's banking index climbed 1.14 percent. The yield on Turkey's two-year benchmark bond was flat at 7.63 percent.

(Additional reporting by Carolyn Cohn and Ece Toksabay; Editing by Nick Tattersall and Toby Chopra)

((seltem.iyigun@thomsonreuters.com)(+90 212 350 70 62)(Reuters Messaging: seltem.iyigun.thomsonreuters.com@reuters.net))