UPDATE 1-Turkey's lira weakens as nationalists say no local election alliance

The currency has lost nearly 35 per cent of its value against the dollar this year on concerns over the central bank's ability to rein in double-digit inflation.

Turkey's lira was nearly 2 per cent weaker against the dollar on Tuesday after the nationalist MHP party said it would not seek an alliance with President Tayyip Erdogan's AK Party in 2019 local elections, raising fears of political instability.

There was no apparent market impact from Erdogan's statement regarding the investigation into the killing of Saudi journalist Jamal Khashoggi. Erdogan dismissed attempts by Riyadh to blame his killing on rogue operatives.

Nationalist Movement Party (MHP) leader Devlet Bahceli said on Tuesday his party would not team up with the AK Party due to a disagreement over the MHP's call for an amnesty for some convicted criminals.

The MHP helped Erdogan secure a narrow win in the first round of presidential elections in June.

The lira later recouped some of the day's losses after Erdogan and Bahceli said their parties would continue to cooperate in parliament.

The lira stood at 5.7750 to the dollar at 1145 GMT, weakening from Monday's close of 5.6640. It had weakened as far as 5.8715 earlier in the day.

The currency has lost nearly 35 per cent of its value against the dollar this year on concerns over the central bank's ability to rein in double-digit inflation faced with criticism from Erdogan and a rift with Washington.

Turkey's pledge to conduct a thorough investigation into Khashoggi's death could help it improve ties with the United States, said Piotr Matys, an emerging market forex strategist at Rabobank.

He added that another important factor on the lira is the central bank's rate-setting meeting on Thursday.

"Today’s spike in USD/TRY is a very timely reminder how quickly volatility can resurface. To our mind, a relatively measured hike would stem at least some FX volatility," he said.

The central bank raised its policy rate by 6.25 percentage points to 24 per cent in September to stem inflation. Since then, inflation hit nearly 25 per cent in September, sharpening the focus on whether the central bank would deliver another hike.

However, 12 out of 15 economists in a Reuters poll said they expect the bank to keep its policy rate unchanged on Thursday. (Reporting by Ali Kucukgocmen Editing by Daren Butler and Raissa Kasolowsky)

(With inputs from agencies.)