Turkish assets initially gained after the bank’s announcements, with an under-pressure lira strengthening to below 1.60 to the dollar from a close on Friday of 1.6035, and banking stocks rallying on hopes for a halt to hikes in reserve rates, which have slashed their profits.

But bank shares then turned lower and the broader Istanbul index traded down 1.8 percent at 61,218 points, lagging a 0.1 percent gain in the MSCI emerging markets index as sentiment turned negative and a support level was breached.

“Investors’ mood may have been negatively affected by the index falling below 62,000 points,” Garanti Yatirim analyst Ozgur Yurtdasseven said.

The central bank said it was cutting daily purchases of foreign currency to $40 million from $50 million and could further restrict the size of its foreign exchange-buying auctions if flows to emerging markets continued to slow.

“The amount of Turkish lira liquidity supplied through this channel will also decrease in this case, causing the need for further hikes to reserve requirement ratios in the second half of 2011 to decrease.”

The bank’s statements followed a sell-off of Turkish assets last week, fueled by eroding global risk appetite and exacerbated by the country’s dire current account deficit.

The lira closed at 1.6020 to the dollar, posting some improvement but still trading close to its weakest levels since March.

“Worries regarding the sustainability of increasing public debt in some European economies have negatively affected risk appetite, causing capital inflows to emerging economies such as Turkey to slow down relatively,” the central bank said.

“Taking this slowdown into account, the daily amount of the bank’s foreign exchange buying auctions has been reduced to $40 million from $50 million as of (Tuesday),” it added.

Ozgur Altug, chief economist at BGC Partners, said the bank’s move signaled it was concerned about the level of the lira.

“Although the central bank does not have an exchange rate target, the bank seems to have some concerns about the level of the exchange basket,” he said in a note.

“We foresee that the central bank’s decision today will have a mild positive impact on the lira, but whether the impact will be permanent or not will depend on external developments and developments in Turkey’s current account deficit.”

The deficit reached an all-time high in March, and its size is seen as a major threat to the Turkish economy, making it vulnerable to external shocks.

April trade data is due on Tuesday. The trade deficit is forecast at $10 billion, a fresh record and signaling further bad news for the current account deficit.

Turkey’s banking index gained almost one percent in early trade on hopes that the central bank would refrain from further required reserve ratio hikes, before falling 0.6 percent in afternoon trade in line with the main index.

Turkish stocks have fallen some six percent this year, significantly underperforming other European emerging markets due to concerns the central bank has fallen behind the curve in fighting inflation with its unorthodox policy mix, and due to the current account deficit.

The benchmark Feb. 20, 2013 bond yield fell to 8.93 percent from Friday’s 8.97 percent.