Turkish assets up on low current account gap, rating hopes

* All Turkish assets firm after current account data

* August current account deficit at $1.18 bln

* C/a deficit figure lower than forecast

ISTANBUL, Oct 11 (Reuters) - The Turkish lira and bonds firmed on Thursday as data showing a lower-than-expected current account deficit for August underpinned prospects for easier monetary policy and reduced demand for dollars.

Turkish shares were trading at their highest in 16-months, buoyed by hopes that ratings agency Fitch, due to conduct an annual review of Turkey soon, will upgrade its credit rating.

Turkey's August current account deficit fell to $1.18 billion, its lowest level since October 2009, central bank data showed on Thursday, and was smaller than a Reuters poll forecast for a deficit of $1.750 billion.

By 1011 GMT the lira had firmed to 1.8130 against the dollar , from 1.8165 late on Wednesday.

"As the current account deficit falls, importers' demand for dollars is likely to be lower. Expectations for Turkey to be upgraded to investment grade also is a positive factor for the lira," said Bilge Gonen, manager of the foreign exchange desk at Eurobank Tekfen.

Late in August, Fitch 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.

Currently, Fitch rates Turkey's creditworthiness at BB+ with a stable outlook, one notch below investment grade. The agency said on Wednesday it will be looking at Turkey's credit rating quite soon.

The markets in Turkey were keeping an eye on border tension with Syria.

The yield on Turkey's two-year benchmark bond

fell to 7.59 percent from a Wednesday's close at 7.63 percent.

"After the data, investors bought short-term bonds on prospects the bank will ease its policy as the economy slows. Unless there is any selling arising from Syria, markets don't expect any tensions," said Suha Yaygin, an emerging markets trader at TD Securities.

Turkey's main share index was up 1.08 percent, its highest level since May 2011, largely outperforming a 0.08 percent fall in the emerging markets index .

"Comments from Fitch and the current account deficit pushed shares up. They allow investors to neglect Syria risks. The downward revision in growth expectations also supports the index as it strengthens the hopes that the central bank will cut the upper end of the interest rate corridor," said Hakan Tezcan, strategist at YF Securities.

The bank cut the upper end of the interest rate corridor by 150 basis points to 10 percent for the first time in seven months in September.

"We expect Fitch to raise the outlook to positive from stable and a credit rating upgrade in the first quarter of 2013," Tezcan said.

(Writing by Seltem Iyigun; Editing by Anthony Barker)

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