By Daren Butler and David Dolan
ISTANBUL (Reuters) - Shares of Turkey's banks and the lira currency fell on Monday as comments from the national banking regulator failed to erase investor concerns over a report that lenders could face substantial U.S. fines for evasion of Iran sanctions.
The Haberturk newspaper on Saturday reported six banks potentially face substantial fines, citing senior banking sources. It did not name the banks. One bank faces a penalty in excess of $5 billion, but other fines will be lower, it said.
"It has been brought to the public's attention that stories, that are rumors in nature, about our banks are not based on documents or facts, and should not be heeded," the BDDK banking regulator said in a statement at the weekend, adding that Turkey's banks were functioning well.
A spokesman for the U.S. Treasury, which is responsible for U.S. sanctions regimes, said: "Treasury doesn't telegraph intentions or prospective actions."
Two senior Turkish economy officials told Reuters Turkey had not received any notice from Washington about such penalties, adding that U.S. regulators would normally inform the finance ministry's financial crimes investigation board.
The report comes as relations between NATO allies Washington and Ankara have been strained by a series of diplomatic rows, prompting both countries to cut back on issuing visas to each other's citizens.
"Given the level of tensions with the U.S., the market is still skeptical about this denial and they would want to hear a denial from the U.S. to really calm down," said Inan Demir, a senior emerging market economist at Nomura.
"The numbers mentioned are large ... the largest fine mentioned was $5 billion and that would be a very large fine in comparison to any bank's equity in Turkey," Demir added.
SHARES LOWER
The Istanbul stock exchange's index of banking shares (XBANK) declined 2 percent by 1000 GMT, underperforming the main share index (XU100), which was down 0.8 percent. The lira <TRYTOM=D3> weakened nearly 1 percent to 3.7050 against the dollar, while the cost of insuring Turkish debt against default spiked to its highest in 12 days.
U.S. authorities have hit global banks with billions of dollars in fines over violations of sanctions with Iran and other countries in recent years.
U.S. prosecutors last month charged a former Turkish economy minister and the ex-head of state-owned Halkbank (IS:HALKB) with conspiring to violate Iran sanctions by illegally moving hundreds of millions of dollars through the U.S. financial system on Tehran's behalf.
Halkbank has said all its transactions have fully complied with national and international regulations.
President Tayyip Erdogan has said he told Washington that Turkey had never agreed to comply with its sanctions on Iran, and has called on the United States to review the indictment.
The U.S. prosecutors' charges stem from the case against Reza Zarrab, a wealthy Turkish-Iranian gold trader who was arrested in the United States over sanctions evasion last year. Erdogan has said U.S. authorities had "ulterior motives" in charging Zarrab, who has pleaded not guilty.
Simon Quijano-Evans, emerging market strategist at Legal & General Investment Management, said U.S.-Turkish relations were at the top of the list of issues investors were focused on. "Any negative or positive noise on that front can cause stronger market reaction in either direction."