By Nevzat Devranoglu and Ali Kucukgocmen

ISTANBUL Turkey's lira weakened 0.8% to a record low on Thursday, extending losses after a heavy selloff in the previous session that was seen as a sign of the authorities easing controls on the foreign exchange market.

The currency later recouped some of its losses, standing at 23.33 against the dollar by 0542 GMT, after touching a record low of 23.39 overnight during illiquid trading hours.

On Wednesday, the lira had plunged 7.2%, recording the biggest intraday drop since a historic crash in late 2021, after the central bank slashed rates in the face of rising inflation as part of President Tayyip Erdogan's unorthodox policies.

Economists said the lira's sharp drop was a signal that Ankara was moving away from state controls towards a freely traded currency, albeit there are numerous regulations and measures that are yet to be rolled back.

The currency is nearing levels where it does not need to be defended through the use of reserves, traders said, adding that they do not expect the lira to depreciate on Thursday as much as it did a day earlier.

"There is no air of panic in the markets as in previous times when there were such high losses. On the contrary, there is a perspective of normalisation, which is important," a forex trader said.

Under Erdogan's unorthodox programme, authorities have been taking a hands-on role in foreign exchange markets, using up tens of billions of dollars of reserves this year alone to hold the lira steady.

But following his re-election last month, Erdogan signaled a U-turn at the weekend by naming Mehmet Simsek, a former deputy prime minister well regarded by foreign investors, as Turkey's new finance minister.

Simsek later said economic policy needed to return to "rational" ground and on Wednesday said there were "no quick fixes" for policy.

CHANGE OF TACK

"We see the lira correction as a realisation on behalf of Turkish policymakers that its liberal use of reserves to defend the currency has run its course for now," said Erik Meyersson, chief emerging markets strategist at SEB.

He said the lira could reach 27 against the dollar by the end of the year. "This is a downward revision to the value of the lira that reflects expectations of authorities trying to control the lira somewhat less," Meyersson wrote.

The central bank's net forex reserves hit an all-time low of negative $4.4 billion last month as demand surged through the elections.

The decline in the reserves was expected to have stopped last week, with traders saying they could enter an upward trend. However they also highlighted the threat posed to the reserves from payments due to be made under a government scheme that protects lira deposits against forex depreciation.

Investors are now awaiting the appointment of a new central bank governor to succeed Sahap Kavcioglu, who has spearheaded Erdogan's rate-slashing drive since 2021.

Under pressure from Erdogan, a self-described "enemy" of interest rates, the central bank cut its policy rate since 2021, sparking a historic lira crisis that sent inflation to a 24-year high above 85% last year.

Erdogan is considering appointing Hafize Gaye Erkan, a U.S.-based senior finance executive, as central bank governor, Reuters reported on Monday.

Some economists expect an emergency rate hike - to around 25% from the current 8.5% - ahead of the central bank's next scheduled meeting on June 22.

(Reporting by Ali Kucukgocmen and Nevzat Devranoglu; Editing by Jonathan Spicer and Gareth Jones)