* Profit taking sees stocks ease from close to record-high
* Lira, bonds strengthen
* Fears of tension ease on public support for reforms
ISTANBUL, March 26 (Reuters) - Turkish shares retreated slightly on Friday from their highest level since late 2007 as investors locked in profits, while the lira and bonds strengthened on a wave of strong sentiment on Turkey. The main Istanbul share index fell 0.76 percent at 56,610.66 points, underperforming the MSCI index of emerging markets which was up 0.29 percent.
Turkish stocks, which doubled in value in 2009, are around 3.5 percent weaker than their all-time peak in October 2007.
Bond prices continued a mini-rally, with the yield on the benchmark Nov. 16, 2011, bond closing to 8.86 percent from a previous 8.93 percent.
Fears of higher inflation in Turkey had pushed the yield well above 9 percent earlier this month, but a more positive outlook on international markets and improving investor mood, particularly towards emerging markets, has seen bonds strengthen.
The lira also gained, closing at 1.5340 to the dollar, compared with a previous close of 1.5380.
Demand for Turkey's favoured banks, which account for more than half of the main index, easing political worries and big inflows from less-favoured emerging markets or troubled sovereigns such as Portugal have all boosted Turkey this week.
"Turkish markets have fallen a little bit after the huge move we made yesterday, but they are still strong," said Ekinciler Invest analyst Selcuk Cekinmez. "On the political side we see less tensions as well."
GARANTI OUTPERFORMS
Banking stocks, which led the market rally on Thursday, saw losses of 1.73 percent and top-traded Garanti Bank fell 4 percent to 7.15 lira.
The bank rose nearly 6 percent on Thursday after sources told Reuters that GE, which is selling its 20.85 percent stake in the lender, has received non-binding bids for the stake.
Turkish assets had been hit this month on concerns about a dispute between the government and judiciary over constitutional reform.
The government wants to amend the constitution to introduce more control over the appointment of judges and prosecutors, a move it says is necessary to meet European Union membership criteria. It has said it will submit its reform draft to parliament before the end of the month.
Critics of the government say the reforms are aimed at consolidating the AK Party's power and weakening the control of its secularist foes at the judiciary.
The party lacks enough votes in parliament to amend the constitution outright, so the proposed amendments would likely face a public referendum.
However fears of tension have eased as polls have showed that the government would find support for its reforms in any referendum. (Reporting by Alexandra Hudson and Thomas Grove; Editing by Susan Fenton, Ron Askew)