EMERGING MARKETS-Stocks hit 17-mth high, Turkey rallies

* Stocks hit 17-mth high, spreads tightest since May 2008

* Lira at 4-wk high, Turkey stocks 1-yr high on IMF hopes

* Ukraine CDS ease after IMF lowers reserves target

By Carolyn Cohn

LONDON, Jan 4 (Reuters) - Emerging stocks hit 17-month highs on Monday, the first full trading session of 2010, on optimism about the world economy and the knock-on effect for riskier markets, while Turkish assets rallied on hopes of an IMF deal.

Hefty stimulus packages from countries such as China and super-low interest rates in developed economies helped to pull the world out of recession in 2009.

The December HSBC purchasing managers' index for China released on Monday gave a further lift to emerging markets, with its highest reading -- 56.1 -- since the survey began in April 2004. [ID:nSGE6030AO] "We've started the new year on a robust note. Chinese PMI numbers were surprisingly high, showing that domestic demand remains strong," said Claire Dissaux, global strategist at Millennium.

Benchmark emerging equities <.MSCIEF> rose 0.5 percent to fresh 17-month highs, following a 74 percent gain last year.

Emerging sovereign debt spreads tightened by 3 basis points to 271 bps over U.S. Treasuries <11EMJ>. Debt spreads are trading around their narrowest levels since May 2008, after compressing by more than 400 bps last year.

Investors are expecting a bumper crop of emerging sovereign Eurobonds this year, with Indonesia, Philippines and Vietnam seen issuing global bonds this month.

TURKEY LIFT

Turkish stocks <.XU100> earlier hit a one-year high and the lira hit a four-week high against the dollar on increasing expectations Turkey will sign a new standby deal with the IMF, although gains were tempered after data showing a higher than expected inflation rate in December.

The previous $10 billion deal with the IMF expired in May 2008 and investors had hoped for a new deal, but negotiations got bogged down as Turkey baulked at some IMF demands.

The cost of insuring Turkish debt against restructuring or default has fallen in the five-year credit default swaps market to 181 bps from 188.9 bps on Dec 22, according to CDS monitor CMA DataVision.

Luis Costa, emerging debt strategist at Commerzbank, recommends selling Turkish CDS at 185 bps for a target at 150-155 bps.

"The implementation of a new IMF agreement will mostly benefit the country in terms of fiscal frameworks," he wrote in a client note.

The forint and zloty hit four-week highs against the euro after supportive purchasing managers' data.

Ukraine CDS have eased, to 24.1 percent upfront from 26.6 percent in mid-Dec, after the IMF threw the country a lifeline last week by dropping the central bank's end-Dec reserves target by $2 billion, allowing Ukraine to use foreign currency to meet Russian gas payments.

Simon Quijano-Evans, emerging Europe economist at Cheuvreux in Vienna, called the move "probably unprecedented".

"That basically deals with the call from the Ukrainian government for an emergency loan in spite of the fact that it hasn't abided by a number of IMF requirements needed to secure the next $3.8 billion loan tranche," he wrote in a client note.

The next tranche of a $16.4 billion IMF deal for Ukraine has been suspended until after Jan 17 presidential elections.

Russian markets are shut this week but investors are watching Russian gas deals, as Russia halted oil supplies to Belarussian refineries after failing to agree terms for 2010, traders said on Sunday.

Russian oil was flowing normally, Belarus' state oil firm said on Monday.

(Additional reporting by Sebastian Tong; Editing by Toby Chopra)