Investors in Turkey on Monday took fright at a new period of political uncertainty after legislative elections, with shares tumbling over five percent and the lira hitting a new record low against the dollar.
Turkey's central bank acted swiftly to give some support to the pressured Turkish lira, saying it was pruning its short term foreign exchange deposit rates effective Tuesday.
The Istanbul stock exchange's BIST 100 index plunged 5.0 percent while the Turkish lira lost 3.8 percent to trade at 2.76 to the dollar.
The lira earlier broke through the 2.8 lira level against the dollar for the first time.
The Justice and Development Party (AKP) won the biggest portion of the vote in Sunday's legislative poll but came well short of an absolute majority in parliament for the first time since it came to power 13 years ago.
The situation has created huge political uncertainty, with a coalition, early elections and a minority government all seen as possible outcomes.
The result also wrecked President Recep Tayyip Erdogan's plan to agree a new constitution to create a strong presidency with him at the top.
"The election outcome failed to clarify uncertainties in Turkish politics," said Ozgur Altug of BGC partners in Istanbul. "Until the formation of the new government, uncertainty will continue."
Fitch Ratings said the inconclusive result "increases near-term political uncertainty and may aggravate tensions regarding economic policy."
The central bank said the foreign exchange deposit short term interest rate has been reduced from four percent to 3.5 percent for dollar deposits and from two percent to 1.5 percent for those in euro.
The decision was due to "recent global and local developments", it said, in an apparent reference to the domestic situation.
The move only had a limited impact on the currency's value but appeared to help it keep earlier losses in check.
- 'Turkey most vulnerable EM' -
The AKP had been lauded in its early years in power for driving Turkey to new levels of growth and prosperity with pro-reform policies.
It has prided itself on its reputation for ensuring financial and political stability after coming to power in the wake of the 2000-2001 financial crisis when the country came close to economic meltdown.
But the election has come against the background of growing concern for the Turkish economy, with growth slipping under three percent in 2014, inflation still high and unemployment ticking up.
Markets had been rattled earlier this year by Erdogan's leanings towards populist economic policies and a standoff with the central bank over interest rates.
William Jackson, economist at Capital Economics in London, said that the uncertainty added to an "ugly mix" of problems, including "rampant inflation, a large current account deficit, and a rapid increase in private sector debt".
"Turkey is perhaps the most vulnerable of any major emerging market at this time," he said in a research note.
There is a long list of outstanding reforms in Turkey, including improving the low domestic savings rate, upping the participation of women in the economy and reducing informal employment.
Standard and Poor's said implementation of reforms "will depend on key cabinet appointments and whether the AKP will choose to form a coalition."
Michael Harris, Turkey equity strategist at Renaissance Capital, however said that while Turkish assets "might well wobble" in the short term, a credible coalition could be good for Turkey.
"We believe a functioning coalition will go a long way to reducing the medium term market and economic risks associated with a consolidation of president Erdogan's power," he said.
Erdogan's plan for the the AKP to grab a thumping majority so he could tighten his control by creating a presidential system had also worried markets.
"A coalition is not something to be afraid of," said Harris.