* Moody's changes outlook to positive from stable
* Raises GDP growth forecast to 6.5 pct for 2010, 5 pct 2011
* Says upgrade rests on improving fiscal fundamentals
* Central bank says inflation will moderate in Q4
* Turkish bond yields fall, lira firms
By Thomas Grove
ISTANBUL, Oct 5 (Reuters) - Moody's revised its outlook to positive on Tuesday for Turkey's Ba2 local and foreiNgn currency debt, citing improved economic and fiscal resilience, in a move that boosted Turkish bonds and the lira currency.
The credit ratings agency said in a statement that it had also raised its forecasts of GDP growth to 6.5 percent this year and 5 percent in 2011, and as a consequence the country's deficit and debt levels have improved beyond the targets set in the government's 2010-12 Medium-Term Plan.
"Turkey's economy has proven to be unexpectedly robust and has recovered to pre-crisis levels," Sarah Carlson, Moody's vice-president and lead sovereign analyst for Turkey, said in a statement.
Carlson said a potential upgrade to Ba1 depended upon a further strengthening of fiscal fundamentals, particularly in light of Turkey's external vulnerabilities, such as its large current account deficit and its reliance on portfolio investment flows, rather than foreign direct investment, to fund the current account deficit.
"The challenge now is for Turkey to once again register larger primary surpluses and continue to reduce its debt levels in order to further bolster its resilience to external shocks," Carlson said.
Markets reacted bullishly to Moody's improved outlook.
The yield on Turkey's April 25, 2012 benchmark bond fell to 7.97 percent from a previous level of 8.05 percent.
The lira firmed to 1.45 against the dollar on the interbank market from a previous level of 1.4525.
Turkey is expected to hold a general election in June next year, when Prime Minister Tayyip Erdogan's AK Party will seek a third consecutive term in power, having already overseen a period of unprecedented economic growth.
"Given Moody's is still one notch below Fitch and two notches from investment grade, the increase in the outlook to positive from stable is still a half-hearted move, especially as CDS levels have been pricing in an investment grade for some time now," Simon Quijan-Evans, analyst at C.A. Cheuvreux, said.
"Nevertheless, any move from ratings agencies ahead of next year's elections should be taken well by markets, given it underlines the investment case versus peers in Eastern and Western Europe," he added.
While Moody's rates Turkey at Ba2, Standard & Poor's has the country on a BB rating, two notches below investment grade and Fitch has it at BB+.
Many analysts argue that Turkey's economic fundamentals deserve an investment grade rating.
Ozgur Altug, chief economist at BGC Partners, said the government should focus on countering the widening current account deficit.
"Moody's recommended that Turkey should now increase its primary surplus again and improve its debt dynamics. We disagree," Altug said.
"We think that the biggest risk in Turkey is a widening current account deficit and this problem should be addressed by the government. The debt dynamics and public finance are at an excellent level, in our view."
The Turkish Central Bank on Tuesday supplied further positive news, saying it expects inflation to gradually decline beginning in the fourth quarter.
Consumer prices rose 1.23 percent in September, and 9.24 percent on an annual basis, accelerating from 8.33 percent in August. (Additional reporting by Nevzat Devranoglu; writing by Simon Cameron-Moore; editing by Stephen Nisbet)