ISTANBUL, Oct 16 (Reuters) - Shares of Turkey's Halkbank plunged as much 7% on Wednesday, despite a ban on short selling, after U.S. prosecutors charged the state-owned lender with taking part in a multibillion-dollar scheme to evade U.S. sanctions on Iran.
The announcement from U.S. prosecutors came a day after Washington imposed sanctions on Turkish officials, hiked tariffs and halted trade talks in an effort to persuade Ankara to stop its incursion against the Kurdish YPG militia in northern Syria.
The U.S. indictment published Tuesday alleges Turkey's second-largest state bank conducted fraud, money laundering, and other sanctions offences. Halkbank had not yet commented on Wednesday.
Before Turkish markets opened, authorities banned short selling on seven large Turkish bank stocks including Halkbank. Selling shares in the banks only to buy them later in the session was also banned, authorities said.
But Halkbank stock fell as much as 7.2% at the open and was down 5.5% at 0705 GMT.
The main banking index - which has plunged more than 16% so far this month on fears of U.S. repercussions - was down 2.5% while Turkey's broader stock index was off 1.4%.
Ties between the NATO allies have become fraught over Turkey's incursion into Syria against the YPG militia, after President Donald Trump's abrupt decision to withdraw U.S. troops from northern Syria.
The YPG, which spearheaded the U.S.-backed Syrian Democratic Forces, was a main U.S. ally in the fight against Islamic State.
The case against Halkbank follows from a previous criminal case that came to light in 2016 against Turkish-Iranian gold trader Reza Zarrab, who was accused of playing a central role in the sanctions evasion scheme.
Mehmet Hakan Atilla, a former Halkbank deputy general manager, was arrested in New York the following year and was later sentenced to 32 months in prison. He returned to Turkey in July after serving out his sentence.
Zarrab pleaded guilty and testified for U.S. prosecutors. He said that Iran, with the help of Halkbank and Turkish government officials including President Tayyip Erdogan, used a complex web of shell companies and sham transactions in gold, food and medicine to sidestep U.S. sanctions.
Turkey has cast the case as a political plot against Erdogan's government and said it is an extension of a 2013 domestic corruption investigation, which Ankara says was launched by the work of the network of Fethullah Gulen, a U.S.-based Muslim cleric.
On Wednesday morning, the Turkish government had not commented on the new Halkbank indictment.
Following Tuesday's announcement in New York, the Borsa Istanbul said its chief executive temporarily banned short selling in banking shares within the top BIST-30 Index, effective from Wednesday.
It said the stocks covered were: Akbank, Garanti Bank, Halkbank, Is Bank, TSKB, VAKIFBANK and Yapi Kredi Bank.
Turkey's Capital Markets Board said the measure was aimed at protecting investors and the transparent and stable operation of capital markets.
A banking analyst, who declined to be named, said a recent decline in the banking index had also influenced the ban, in addition to the Halkbank case.
"(The Halkbank case) has always been on the table as political leverage," the analyst said, also citing a 8% fall in the banking index on Monday.
"This is a sort of intervention on the free market," the analyst added.
The U.S. sanctions and increased tariffs risk creating another setback for Turkey's economy, which has struggled to leave behind a recession after a currency crisis last year.
Last year's crisis was set off by concerns over political interference in monetary policy and deteriorating ties between Ankara and Washington. The lira lost nearly 30% against the dollar last year.
Reporting by Ebru Tuncay and Can Sezer; Writing by Ali Kucukgocmen; Editing by Jonathan Spicer