Turkish lira rises, stocks hit 17-month high on rating hopes

* Lira up, shares at highest since May 2011

* Rating upgrade hopes support Turkish assets

* Bond yields a touch lower, tracking lira

ISTANBUL, Oct 12 (Reuters) - Turkey's lira firmed and stocks hit a 17-month high on Friday on hopes of a credit rating upgrade, although central bank comments that inflation was set to remain above target dampened some investor enthusiasm.

By 0826 GMT the lira had firmed to 1.8072 against the dollar , from 1.8092 late on Thursday. Against its euro-dollar basket it stood at 2.0753, from 2.0774.

"Turkey has a positive scenario. The prospects of a credit rating upgrade boosted inflows to Turkish assets so the lira is trading strongly," said Bilge Gonen, the head of forex at Istanbul-based Eurobank Tekfen.

Credit ratings agency Fitch said on Wednesday that Turkey was making good progress in dealing with the financial crisis and that it will look again soon at its rating.

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

The agency said in August 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 and narrows the current account gap to a more sustainable level.

Central bank governor Erdem Basci said on Friday the bank would maintain its cautious stance regarding pricing behaviour, with inflation set to stay above its 5 percent target for some time.

Basci also reiterated that the fall in inflation would be more evident in the last quarter of the year, according to a presentation he made at the IMF-World Bank meetings in Tokyo.

"Although they say they would keep the cautious stance, the bank's current policy is focused on supporting growth and not the fall in inflation," said Tufan Comert, strategist at Garanti Securities.

"Therefore, further strengthening in the lira would be limited."

Turkey's main share index was up 0.49 percent at 69,938 points, its highest since May 2011, outperforming a 0.26 percent rise in the emerging markets index .

"Rating revision expectations keep the market alive and the buying in the index is likely to continue today as well," analysts at Ata Invest said in a research note.

The yield on Turkey's two-year benchmark bond

was at 7.56 percent, slightly down from Thursday's close at 7.59 percent. Traders said the lira's strengthening was supportive for bonds.

(Writing by Seltem Iyigun; Editing by Nick Tattersall)

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