(Updates prices, adds analyst comment on Halkbank)
ISTANBUL, Oct 12 (Reuters) - Turkey's skittish lira moved in and out of negative territory on Friday as investors weighed the prospects for the release of a U.S. pastor whose trial has strained relations with Washington.
The lira was trading at 5.90 to the dollar at 1134 GMT, unchanged from Thursday's close. Earlier on Friday, it gained to 5.85 - its strongest level in two months - before reversing course.
It rose 3 percent on Thursday on expectations that the pastor, Andrew Brunson, would be returned to the United States after Friday's court hearing.
"If he is released, it would be a major positive signal for the lira and should prove sufficient for USD/TRY to convincingly break below the support area around 6.00 towards the 5.6968 level," Piotr Matys of Rabobank said in a note to clients.
The case of Brunson, an evangelical Christian from North Carolina, has heightened tension between the NATO allies, helping to send the Turkish currency down 40 percent this year. He faces terrorism charges, which he denies.
NBC News reported that the White House expected Brunson to be released by Turkey and returned to the United States in the coming days, according to two senior administration officials and another person briefed on the matter.
NBC cited its sources as saying that under an agreement which U.S. administration officials recently reached with Turkey, Brunson is supposed to be released after certain charges against him are dropped at Friday's hearing.
The report could not be confirmed.
Brunson's lawyer told Reuters earlier that new prosecution witnesses expected to testify on Friday in his trial lacked relevance because their testimony was expected to focus on incidents after his arrest.
Istanbul's main stock index was up 1.60 percent, with shares in state lender Halkbank rising 4.91 percent, having briefly dropped 6.2 percent before a temporary suspension in trading.
A U.S. judge sentenced Halkbank executive Mehmet Hakan Atilla in May to 32 months in jail after he was convicted of taking part in a scheme to help Iran evade U.S. sanctions. The case is another source of strain in Turkish-U.S. relations .
One analyst said the volatility in Halkbank's shares is due to Brunson's trial. Markets believe the pastor's release would signal an improvement in Turkey-U.S. relations and could reduce or prevent a fine on Halkbank by the U.S. Treasury, the analyst said.
Turkey has dismissed the Halkbank case as politically motivated, and the Turkish finance minister has said he does not expect Halkbank to face any fine in relation to dealings with Iran. (Reporting by Daren Butler and Sarah Dadouch; editing by Ali Kucukgocmen, David Dolan, David Stamp and Larry King)