ISTANBUL, Dec 26 (Reuters) - Turkey's lira fell to an all-time low against the dollar on Thursday as a cabinet reshuffle by Prime Minister Tayyip Erdogan failed to calm investor nerves set on edge by a deepening corruption scandal.
Despite the country's central bank having stepped up efforts to defend the currency, the lira weakened to as low as 2.1035 from 2.0850 late on Wednesday, while stocks and government bonds also fell. The lira stood at 2.0980 by 1126 GMT.
Turkey's opposition accused Erdogan on Thursday of trying to rule via a secretive 'deep state' after he named 10 new loyalist ministers late on Wednesday, raising the temperature in a week-long crisis that has pitted the prime minister against the judiciary and reigniting anti-government sentiment that has simmered since mass protests in mid-2013.
Three cabinet members earlier resigned after their sons were detained in the graft probe, which erupted on Dec. 17.
'The dismissal of half an entire cabinet is worrying enough. The corruption probe is escalating by the day, causing a further deterioration in market sentiment towards Turkey,' said Nicholas Spiro, head of Spiro Sovereign Strategy.
'Political risk in emerging markets - and in several advanced economies for that matter - is emerging as a major theme in 2014, and Turkey has become a focal point for market anxiety.'
The local financial community and foreign investors have generally seen Erdogan as a known quantity who has supported a decade of growth and a broadly economically liberal policy drift.
Already under pressure this year in anticipation of the U.S. Federal Reserve's decision this month to stem a flood of dollars that has boosted global markets, the lira has been beaten down further by the corruption probe.
On Tuesday the central bank said it was increasing the scale of the regular hard currency auctions it runs in support of the lira, signalling sales worth at least $6 billion by the end of January.
Turkey has seen explosive consumption-led growth over the past decade during Erdogan's rule, with per capita wealth almost tripling in nominal terms. But its low savings rate and huge energy deficit have made it heavily dependent on volatile foreign capital flows.
The yield on the country's 10-year benchmark bond rose to 10.33 percent on Thursday from 10.09 percent on Wednesday.
The main stock index fell 1.09 percent to 65,379 after sustaining heavy losses last week.
'(Market) direction will be determined by political risk perception,' said Ali Cakiroglu, a strategist at HSBC Portfolio, adding that moves would be limited because many financial centres were closed for the Christmas holidays.
(Reporting by Seda Sezer; Editing by John Stonestreet) Keywords: MARKETS TURKEY/
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