EMERGING MARKETS-Turkish stocks down more than 3 pct; no emerging market spillover

By Sujata Rao

LONDON, July 21 (Reuters) - The Turkish lira hovered just off record lows on Thursday and stocks plunged almost 4 percent after the imposition of a state of emergency and fears the country would lose its investment-grade credit rating.

There was little sign of contagion to broader emerging markets however, with investors elsewhere focusing more on prospects of a renewed U.S (Other OTC: UBGXF - news) . interest rate rise this year and the dollar's bounce to four-month highs on Wednesday.

MSCI (NYSE: MSCI - news) 's emerging equity index inched to the highest in nine months lifted by gains in Asia, while sovereign emerging dollar bond spreads over Treasuries were at 374 basis points, just off one-year lows.

Turkish markets continued to tank after S&P Global (NYSE: SPGI - news) cut the sovereign rating to BB/B and Moody's put a host of companies on review for downgrade, while President Tayyip Erdogan declared a three-month state of emergency in response to a failed coup.

JPMorgan (LSE: JPIU.L - news) said that while the S&P move would not affect Turkish bonds' eligibility for investment-grade-only hard currency indexes, "S&P's action may increase market expectations of a downgrade to sub-investment grade by Moody's."

The move will also likely cause up to $1 billion of Turkish debt to be sold by funds tracking the investment-grade portion of the GBI-EM local currency bond index, JPM added.

Istanbul shares fell to the lowest since mid-February but some stocks such as Turkish Airlines touched 3-1/2 year lows. Credit default swaps jumped 10 bps to five-month highs.

The lira firmed 0.3 percent against the dollar after slumping to record lows on Wednesday while one-month implied volatility jumped to 13-month highs

William Jackson at Capital Economics said Turkey's current account deficit made it highly vulnerable to a slowdown in capital flows and the currency would stay under pressure.

"The political moves point in the direction that things are likely to get worse rather than better from here on. So the lira is more likely to fall than to rise," he said.

"This is about Turkish politics - I don't think there are other countries where politicians will take their cue from developments in Turkey," Jackson added.

Analysts at BNP Paribas (LSE: 0HB5.L - news) also predicted more pressure. "Even (Taiwan OTC: 6436.TWO - news) after the sharp depreciation in lira, we calculate real effective exchange rate index about 7 percent above its lows reached in January 2014 and September 2015," they added.

Elsewhere, the rand firmed 0.4 percent as the dollar pulled back and investors expected the central bank to keep interest rates on hold at 7 percent and deliver a hawkish statement.

Earlier, Asian currencies were flat to slightly weaker, though the Malaysian ringgitt fell to three-week lows after U.S. and Singapore regulators seized assets over an investigation into the state-owned 1MDB fund.

Nigeria's naira had hit a record closing low on Wednesday around 292 per dollar. In non-deliverable forward markets, the one-month naira-dollar forward was quoted around 314 while the black market rate touched 368

For GRAPHIC on emerging market FX performance 2016, see http://link.reuters.com/jus35t

For GRAPHIC on MSCI emerging index performance 2016, see http://link.reuters.com/weh36s

For GRAPHIC on MSCI emerging Europe performance 2016, see http://link.reuters.com/jun28s

For GRAPHIC on MSCI frontier index performance 2016, see http://link.reuters.com/zyh97s

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see ) (Addditional reporting by Claire Milhench; Editing by Andrew Heavens)