Turkey Markets Hit After Weekend of Violence

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Turkish stocks dropped 1.7 percent and benchmark bond yields rose to 6.51 percent on Monday from 6.21 percent on Friday after a weekend crackdown by police on protesters.

Riot police stormed Istanbul's Gezi park on Saturday night, sparking a night of rioting after Prime Minister Tayyip Erdogan gave protesters a final warning. Police last week cleared neighboring Taksim square using water cannons and teargas.

"The crisis has taken a turn for the worse due to the ongoing police crackdown on anti-government protesters," Wolfango Piccoli, managing director of consultancy firm Teneo Intelligence said on Sunday.

(Read More: Turkey Enters New 'Phase' After Police Action)

The two weeks of protests were originally sparked over plans to develop a shopping mall in Istanbul, but have escalated into anger at the government and Erdogan's perceived authoritarian rule.

On Sunday, Erdogan spoke to thousands of supporters of his AKP party in Istanbul and said the protesters had been manipulated by "terrorists". He also lashed out at foreign media companies, singling out BBC, CNN and Reuters, accusing them of fabricating news.

Piccoli said the Erdogan speeches had dashed all hopes of a compromise. "The risk of an escalation of the crisis, which could pave the way for more clashes and unrest, is now substantial," he added.

"There is also a growing risk that certain high-profile individuals and business entities (including some of the country's largest conglomerates) accused of backing the protesters may become the target of a political vendetta by government in the aftermath of the crisis."

Analysts said reports that the police had to intervene to protect 50 opposition demonstrators in the central city of Konya from an attack by government supporters was a sign the violence was spreading.

(Read More: Turkish Riot Police Enter Istanbul's Taksim Square)

Two of Turkey's major workers unions called a one-day strike on Monday to protest the weekend action by police.

Timothy Ash, head of emerging markets research warned on Monday the developments would be negative for foreign investors and markets. But he said the downside could be limited via intervention by the Turkish central bank to support the lira.

"Domestic, privately owned banks and financial institutions are likely to remain on the sidelines, fearful of suffering increased regulatory oversight/action for being seen to sell down the market," he added.