ISTANBUL (Reuters) - Turkish assets trimmed losses on Thursday after Turkey said Syria had apologized for a mortar strike that killed five civilians in southeast Turkey, which investors said would help reduce tensions between the two nations.
Syria has apologized through the United Nations for Wednesday's strike and said such an incident would not be repeated, Turkish Deputy Prime Minister Besir Atalay said on Thursday.
Turkish artillery had hit targets near the Syrian border late on Wednesday and early on Thursday after the artillery shelling from Syria killed five Turkish civilians.
After the incident, the government won parliamentary approval to send soldiers to foreign countries if necessary. Its memorandum said "aggressive action" by Syria's armed forces against Turkish territory posed a serious threat to national security.
By 1507 GMT, the lira firmed to 1.7985 against the dollar, after hitting its weakest since mid-September of 1.8110. But it was still a touch weaker compared with 1.7966 late on Wednesday.
"Syria's apology is a very important factor in the lira's strengthening, as it showed there won't be any tension between the two countries," said Burcin Metin, head of the forex desk at ING Bank.
"Investors don't want to price in any bad developments for now. If there isn't any new attack, the lira could return to its levels before the Syria crisis," Metin said, adding that inflows into the bond market also helped the lira to recover.
Against its euro-dollar basket, the lira eased at 2.0673, after hitting its weakest since September 18 of 2.0759, from 2.0578.
The yield on the two-year benchmark bond closed at 7.61 percent, down from its intraday high of 7.75 percent. It was virtually unchanged from a previous close at 7.58 percent.
"Syria's apology reduced the probability of a war. The improving sentiment on global markets also was helpful to bonds," said Erdinc Mogol, manager of treasury marketing at Akbank.
The main share index closed 0.13 percent up at 66,909 points in line with a rise of 0.22 percent rise in the emerging markets index. Shares recovered from around a 1.7 percent drop in intraday trade.
"Following the Syria apology, most liquid shares such as banks and Turkish Airlines recovered. We will probably see this recovery continue tomorrow," said Onur Mutlu, research manager at Gedik Investment.
Shares in Turkey's national carrier Turkish Airlines closed 1.03 percent up at 3.94 lira.
Turkish banking shares rose 0.84 percent.
Shares in Aselsan, Turkish defence and electronics company Aselsan closed flat at 6.76 lira, after rising around 6 percent in intraday trade due to political tensions.
Writing by Seltem Iyigun; Editing by Nick Tattersall and Ruth Pitchford