* Turkish lira hits record low of 7.24 to the dollar overnight
* Lira crisis hits South African rand, Russian rouble, China yuan
* MSCI EM stock index falls 1.8%, close to more than 1 year low
By Karin Strohecker and Swati Pandey
LONDON/SYDNEY, Aug 13 (Reuters) - The crisis engulfing Turkish markets over its diplomatic rift with the United States sent tremors through emerging markets on Monday, knocking some main currencies to multi-year lows and weighing heavily on equities.
Investors fear the selloff in the lira, which hit a fresh record low overnight, could have a ripple effect in global financial markets, with the euro, South Africa's rand and Mexico's peso already dented by Turkey's crisis.
The lira TRYTOM= pared some of its losses against the dollar after the central bank said it had lowered reserve requirement ratios for banks as well as pledged to provide whatever liquidity banks needed and to take all necessary measures to maintain financial stability. the Turkish currency was still down more than 6 percent on the day and within spitting distance of a record low around 7.24 hit it early Asian trade. The lira has weakened nearly 45 percent since the start of the year.
Turkey's local bond markets saw yields spike above 21 percent, while dollar-denominated bonds issued by the government and banks suffered a steep selloff. Istanbul's stock exchange halted trading in three of the country's leading banks after they tumbled more than 11 percent. a textbook crisis – for many years everybody said Turkey was a weak country due to its large external debt and current account deficit," said Guillaume Tresca, senior emerging markets strategist at Credit Agricole (PA:CAGR).
"There is nothing surprising other than that the central bank is not really reacting. They issued this new plan but there is no tightening of financial conditions – they are completely behind the curve."
Other main currencies were caught in the vortex. South Africa's rand ZAR=D3 skidded to levels not seen since mid-2016 and Russia's rouble RUB= slumped to a near 2-1/2 year trough.
The Indian rupee slid to an all-time trough INR=D3 , while the Indonesian rupiah IDR=D3 hitting a near three-year low prompted the central bank to intervene. China's yuan CNY= weakened 0.5 percent - its steepest daily decline in nearly four weeks.
The wave of selling was triggered on Friday when U.S. President Donald Trump announced tougher sanctions on Turkish steel and aluminium exports, causing a spike in emerging foreign exchange volatility gauges.
Adding to the emerging market woes, Washington imposed surprise sanctions last week against Russia. safe haven currencies and bonds rallied. The dollar index .DXY held near its one-year top of 96.522, while the Japanese yen JPY= climbed for a second straight day to a 1-1/2 month peak.
However, the sell-off was not limited to emerging markets: the euro EUR= stumbled to more than one-year lows on worries about European bank exposure to Turkey. BBVA BBVA.MC , Italy's UniCredit CRDI.MI and France's BNP Paribas BNPP.PA have some of the largest operations in Turkey among the euro zone banks.
The fear of contagion reverberated across equity markets.
MSCI's broadest emerging markets index .MSCIEF slipped 1.8 percent and traded within eyesight of a one-year low hit in June. The benchmark was pulled lower by hefty falls in Asian heavyweights South Korea .KS11 and Hong Kong .HSI , where indexes fell around 1.5 percent, while Taiwan .TWII tumbled more than 2 percent. MKTS/GLOB
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