Ankara and Washington have sparred publicly for months over the S-400 missile systems, expected to be delivered to Turkey as early as next month. Washington has said that would trigger U.S. sanctions under CATSAA, a law calling for sanctions against countries procuring military equipment from Russia.

The lira stood at 5.8750 against the dollar at 0633 GMT, weakening from Tuesday's close of 5.8265. Earlier, it weakened as far as 5.9250.

The most severe package under discussion would all but cripple the already troubled Turkish economy, Bloomberg reported three people familiar with the matter as saying.

It said the idea with the most support for now is to target several companies in Turkey's defence sector with sanctions that would effectively sever them from the U.S. financial system, making it almost impossible for them to buy American components or sell their products in the United States.

"We see negative newsflow this morning. News that new sanctions are being assessed created selling pressure on the lira," said a treasury desk trader at one bank.

"We can't say the impact is that great because no concrete step is expected before the Trump-Erdogan talks. But in the period ahead, relations with the U.S. will remain the main topic on the market's agenda," he said.

The dispute between the NATO allies has set investors on edge, sending the lira down nearly 10% against U.S. dollar so far this year. A currency crisis last year tipped economy into recession.

The S-400s are not compatible with NATO's defence systems and Washington says they would compromise its F-35 fighter jets.

Ankara has repeatedly said that it will not back down from its Russian order adding that it will "take reciprocal steps" if the United States imposes sanctions.