* Former Halkbank executive sentenced in May
* Found guilty of helping Iran evade U.S. sanctions
* Case has strained ties between U.S. and Turkey
* Erdogan has said case is politically motivated
* Halkbank shares rise nearly 4 pct (Adds Erdogan comment)
By Tuvan Gumrukcu
ANKARA, Dec 7 (Reuters) - New York prosecutors have withdrawn an appeal to extend the sentence of a former executive at Turkey's state-owned lender Halkbank, Turkey's state-owned Anadolu news agency said on Friday.
Halkbank shares rose nearly 4 percent after the report as market participants saw the move as further indication of an improvement in diplomatic ties between Washington and Ankara.
A U.S. court sentenced Hakan Atilla, an executive from Halkbank, to 32 months in prison in May for helping Iran evade U.S. sanctions in a case that has strained already tense ties between NATO allies Ankara and Washington.
Halkbank, which denies any wrongdoing, has since faced potential U.S. fines in relation to the case, which Turkish President Tayyip Erdogan has condemned as a political attack against his government.
Anadolu, without citing sources, said the New York prosecutor's office had originally filed the appeal, saying the sentence was too short. It said the court had asked prosecutors to present details of the appeal by Dec. 6, but that the appeal had later been withdrawn.
No further details were immediately available and the New York prosecutor's office was not available for comment early on Friday.
Halkbank's dollar-denominated bonds jumped 0.74 cents to 84.70 cents after the report.
"It is good news that the U.S. prosecutor's office is not appealing to have the sentence prolonged or extended – it's a sign of improving relations between Turkey and the U.S.," said SEB's Per Hammarlund.
Last month, Turkish Foreign Minister Mevlut Cavusoglu said after talks with U.S. officials in Washington that the two sides had discussed returning Atilla to Turkey where he can serve the rest of his sentence.
Asked about Anadolu's report while speaking to reporters in Istanbul after Friday prayers, Erdogan said: "There are positive developments. I hope we get the results of our expectations."
Last month, Erdogan said he discussed the case of Halkbank with U.S. President Donald Trump, saying the talks were on a "positive path".
Atilla is expected to be released on July 25, Anadolu said. He had already served 14 months when he was sentenced.
Tensions between the NATO allies accelerated a lira sell-off this year, although the currency's performance has improved in tandem with diplomatic ties.
Relations between Ankara and Washington began to improve after U.S. pastor Andrew Brunson, who was on trial over terror-related charges in Turkey, was released in October.
They remain divided on other issues, including U.S. policy in Syria and Turkey's request for the United States to extradite Fethullah Gulen, a cleric Ankara blames for organizing the 2016 abortive putsch. Gulen denies involvement. (Additional reporting by Ece Toksabay in Ankara, Ali Kucukgocmen in Istanbul, and Karin Strohecker in London; Editing by David Dolan and Janet Lawrence)