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Monday May 15, 8:47 PM Turkish markets slide amid foreign capital flight ISTANBUL, May 15 (Reuters) - The lira tumbled almost five percent on Monday, dragging shares and bonds in its wake, as capital flight gained momentum among investors spooked by Turkey's economic prospects, political jitters and the overall emerging market outlook. Despite global dollar weakness, the lira has lost about 10 percent of its value against the U.S. currency over the last week to hit its weakest level since November 2004 at 1.4775 at 1243 GMT, some five percent weaker than Friday's close of 1.4005. The yield on the benchmark April 9, 2008 bond rose to its highest level in 2006 and at 1211 GMT was quoted at 14.82 percent, from Friday's 14.50 percent. The extended lira weakness prompted economists to speculate whether the central bank would act to rein in market volatility. "Starting from 1.50 we could see some verbal intervention ... they can't really allow for weaker currency (in view of) higher oil prices and they have a really optimistic inflation target," BNP Paribas economist Anne-Sophie Beotti said, noting Turkey is a net importer of oil. She added she would not expect real intervention before the currency hit 1.55 to the greenback. The central bank is targeting 5 percent year-end inflation, well below April's higher-than-forecast 8.8 percent, cited as one of the triggers of this sell-off. Other analysts also saw further losses for the lira. "The sizeable currency weakness makes it tempting to dip toes in the Turkish market," Merrill Lynch economist Mehmet Simsek said in a research note. "However, in the absence of policy action, we are concerned that the ongoing rapid lira depreciation may trigger local retail demand for foreign currency, putting further pressure on the currency," he said. Istanbul's main share index fell as much as 5 percent but later trimmed that to 3.3 percent, at 40,590 points. "I expect the stock exchange to remain on a downward course because of the flight of foreign funds," said Garanti Investment technical analyst Tolga Kudaloglu, adding that index support was at 40,000 points. In a bid to calm markets, Deputy Prime Minister Abdullatif Sener told reporters the latest fluctuations were in the range of expectations and said the current account deficit was not a worry in current talks with the International Monetary Fund. Economy Minister Ali Babacan on Sunday blamed the falls on external factors which he said would have a limited impact on the economy of the EU-applicant country. TURKEY'S VULNERABILITY Turkey recovered strongly from a 2001 financial crisis with multi-billion dollar IMF loan deals, cutting inflation to single digits and lifting economic growth to around eight percent. But economists see the large current account deficit as a growing worry while April inflation was sharply higher than expected, jeopardising a 2006 target of 5 percent. The latest lira slide was set to have a mixed impact. "The (current account) data hasn't been so bad recently and the sell-off will bring about an improvement in the gap," said American Express economist Sarah Hewin, but added: "the decline in the lira will make it harder to reach inflation targets". Economists were also closely watching lira depreciation against the euro, against which it has lost 14 percent of its value this year according to Reuters data, in a boost for exports to Turkey's major trading partner. Investor confidence has also been sapped by concerns about the impact of high oil prices on import-reliant Turkey, lower tourist numbers, fears of dwindling enthusiasm for EU-sought reforms, speculation about early elections and tensions over neighbouring Iran's nuclear programme. The capital flight has partly been fuelled by emerging market concerns about rising U.S. Treasury yields amid signals from the Federal Reserve that it is on guard against inflation despite expectations of a pause in the rate-tightening cycle. Growing political tensions between Turkey's secular establishment and the ruling Justice and Development Party, which has Islamist roots, have also undermined sentiment. Tera Brokers managing director Emre Tezmen said Turkey was probably one of the emerging markets most vulnerable to global market trends. "We do not expect a one-way negative trend in Turkey but unless there is a significant improvement in the outlook any rebounds would be used as a selling opportunity, capping any upside potential," he said. (Additional reporting by Emma Ross-Thomas, Humeyra Pamuk)