Ratings agency Fitch became the latest to sound the alarm about Erdogan's drive for greater control over the central bank, saying the president's rhetoric could put further pressure on Turkey's sovereign debt rating.
Investors have been unnerved by Erdogan's comments last week, made during a visit to London, that he wants greater control over monetary policy after presidential and parliamentary elections due on June 24.
"Monetary policy in Turkey has long been subject to political constraints, but an explicit threat to curb the central bank's independence increases risks to the policymaking environment and to policy effectiveness," Fitch said.
"Greater erosion of monetary policy independence would put further pressure on Turkey's sovereign credit profile."
Fitch, like the other major ratings agencies, rates Turkey's sovereign debt as "junk", or non-investment grade.
Erdogan's comments have reinforced long-standing worries about the central bank's ability to tackle double-digit inflation. A self-described "enemy of interest rates", the president wants lower borrowing costs to fuel new credit and construction.
The lira was at 4.6190 to the dollar at 1138 GMT, from Monday's close of 4.5740. It had weakened as far as 4.6256, a record low.
"The perception of Turkey has deteriorated to such an extent that it cannot be repaired of its own accord," said one forex trader at a bank in Turkey.
EMERGENCY ACTION
The lira's drop of some 17 percent this year has made it one of the worst-performing emerging market currencies and has heightened expectations that the central bank may be forced to take emergency action and raise interest rates before its next scheduled policy-setting meeting on June 7.
"The central bank will have to step in at this point," Cristian Maggio, head of Emerging Market strategy at TD Securities.
"The problem with Turkey is that the independence of monetary policy has been largely compromised by the way the politics works."
The yield on Turkish ten-year government bonds fell to their lowest in four sessions. Earlier on Tuesday yields briefly spiked to their highest in at least eight years. The main share index rose 0.64 percent.
The bank said last week it was closely monitoring "unhealthy price formations" and would take necessary steps, considering the impact of these developments on the inflation outlook. It raised its late liquidity window by 75 basis points, to 13.5 percent at its last meeting.
Analysts have said an increase of another 200 basis points would likely be needed to put a floor under the lira.
The central bank last week raised its annual inflation forecast to 11.07 percent for the end of this year, from 10.07 percent previously.