February 28, 2020 / 6:27 AM / in 6 months

UPDATE 4-Turkish stocks tumble, lira hits 17-month low in 'perfect storm'

* Turkey stocks tumble 10% at open

* Lira hits 17-month low in early trade

* Dollar bonds drop, CDS spike (Updates prices, adds comment)

By Ezgi Erkoyun and Daren Butler

ISTANBUL, Feb 28 (Reuters) - Turkish stocks and the lira tumbled on Friday as rising tensions following an air strike in Syria's Idlib province that killed 33 Turkish soldiers exacerbated a wider meltdown in emerging market assets over fears of the coronavirus spread.

The lira tumbled to a 17-month low of 6.2525 against the dollar in early trade but later curbed some of the losses to trade 0.1% weaker at 6.2005. The currency has weakened more than 4% since the start of the year.

In a "flash crash" in Asian trade on Aug. 26 last year, the lira briefly hit 6.47 when liquidity was very low.

"Turkey is between a rock and a hard place in this moment - the rock is the international context risk given the coronavirus emergency and the hard place is the situation it has put itself into in Syria," said Cristian Maggio, head of emerging markets strategy at TD Securities.

"Turkey is facing the perfect storm."

Maggio said the lira might have been cushioned by intervention from state banks, which have helped defend the lira over the past year during periods of high volatility.

The main BIST 100 share index fell 10% at open despite a day-long ban in short selling. The index recovered some losses but still traded down 3.9% at 1105 GMT. The banking index dropped 5.79%.

Trading circuit breakers were applied to several stocks on the exchange. The Turkish Capital Markets Board said it had banned short selling on all shares listed on the Istanbul bourse on Friday. It has taken similar steps in the past in times of high volatility, including last year.

Turkey's hard-currency assets also felt the heat. The cost of insuring exposure to the country's sovereign debt hit a four-month high of 351 basis points while many of its dollar-denominated bonds dropped between 3-4 cents.

One-week implied volatility of Turkish currency rose to the highest since June. Meanwhile data out on Thursday showed Turks ramped up their foreign currency holdings to a record high last week.

The killing of 33 Turkish soldiers, in an air strike by Syrian government forces in Syria's Idlib province, raised the Turkish military death toll in the region to 54 this month.

Ankara responded to the strike by saying it would no longer stop refugees from Syria reaching Europe, a move that would reverse a pledge Turkey made to the European Union in 2016 and that could quickly draw Western powers into the crisis.

Turkey has sent thousands of troops and heavy military hardware into Syria and President Tayyip Erdogan has warned that Turkey would launch a full-scale offensive to repel Syrian forces unless they pulled back by end-February.

Markets took little solace from data showing that the economy grew a much-faster-than expected 6.0% year-on-year in the fourth quarter and nearly 1% in 2019 as a whole, marking a strong rebound from the recession following the 2018 currency crisis.

The yield on the benchmark 10-year bond rose to 12.66% on Thursday from 12.47 on Wednesday. (Reporting by Ezgi Erkoyun and Daren Butler in Istanbul Additional reporting by Can Sezer in Istanbul and Karin Strohecker in London Editing by Daren Butler, Jonathan Spicer, Himani Sarkar and Frances Kerry)

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