* Moody's upgrades Turkey by one notch
* Turkish assets rally
* Moody's says Turkey can absorb shocks, access capital
ISTANBUL, Jan 8 (Reuters) - Ratings agency Moody's on Friday upgraded Turkey by one notch to Ba2 from Ba3, citing growing confidence in Turkey's ability to absorb shocks, regroup during recession, and access funding.
The outlook was changed to stable from positive and Moody's said the foundations for long-term growth looked robust.
"Although Turkish growth has contracted very sharply -- even more sharply than was seen in its 2001 financial crisis -- the resilience of the public finances relative to past such crises has been notable," said Sarah Carlson, the lead analyst for Turkey in Moody's Sovereign Risk Group.
"The ability of the government and the country more generally to regroup when faced with a very significant economic and financial challenge indicates that Turkey has reached a higher level of resiliency, which is what our ratings ultimately reflect."
This week's $2 billion eurobond issue by Turkey, which was well over-subscribed, showed Turkey had proven access to foreign capital, Moody's said.
Turkish stocks <.XU100> rose as much as 1.25 percent and the yield on the Turkish benchmark bond fell to 8.55 percent from a previous close of 8.85 percent after the move.
The lira
Turkey's stock index is trading at around two-year highs after nearly doubling last year to be among the best emerging market performers.
"Going forward, an upgrade from S&P is likely to follow this. However, as we noted this morning, we think rating agencies have been way behind the curve. Turkey CDS is trading below higher rated counterparts such as Romania (BB+) and Hungary (BBB-, investment grade).
Moody's put its Turkey rating on positive watch last September. Last December Fitch upgraded Turkey two notches to just below investment grade, in a move analysts saw as long overdue, with other ratings agencies expected to follow suit.
"The markets had been focusing on rumours of an upgrade by Standard & Poors, but then Moody's snook up on the rails ... bit disappointing that Moody's only moved one notch," said analyst Timothy Ash at Royal Bank of Scotland.
Moody's said downside risks remained such as debt affordability and the lack of policy rules to instill additional financial discipline in the government's spending.
An election due in 2011 could also lead to more policy volatility, it said.
Analysts said ratings agencies were catching up with more positive market assessment of Turkey.
"Going forward, an upgrade from S&P is likely to follow this," said Inan Demir, economist at Finansinvest. "We think rating agencies have been way behind the curve. Turkey CDS is trading below higher rated counterparts such as Romania (BB+) and Hungary (BBB-, investment grade)." (Editing by Mike Peacock)