* Bond yield rises after rate cut meets forecast
* Bank measures raise cost of short-term funding
* Lira extends three-month low
ISTANBUL, Dec 17 (Reuters) - Turkish bond prices weakened on Friday and the lira hit a three-and-a-half-month low after the central bank cut its key interest rate by 50 basis points to curb inflows of "hot money". The Turkish stock index declined.
The central bank announced a raft of measures to encourage investors to hold longer maturities, tame domestic credit expansion and ultimately stabilise a soaring current account deficit late on Thursday and early Friday.
"If they see no change in the capital inflows situation they will probably cut again by 50 basis points," said Gaelle Blanchard, a London-based emerging markets strategist at Societe Generale.
"We are sceptical about this and we think there is really a risk that because of this policy they may have to raise rates in a rush next year."
The measures included a cut to the key repo rate to 6.5 percent from 7.0 percent, a wider spread between overnight borrowing and lending rates, and higher required reserve ratios on shorter-term maturities.
The bank raised the lira reserve requirement ratio to 8 percent on deposits of up to one month maturity from a previous 6 percent. It also set the ratio at 7 percent for deposits of up to six months' maturity, 6 percent for up to a year's maturity and 5 percent for one year and longer.
Higher reserve ratios will offset any additional liquidity created by a lower interest rate. The bank said the revisions would reduce liquidity by 7.6 billion lira and $200 million.
The yield on the benchmark Aug. 8, 2012, bond stood higher at 7.33 percent from a record low of 7.28 percent.
Bond yields rebounded on Friday after falling earlier in the week as markets bet on speculation that the rate cut could have been as much as 100 basis points.
The lira extended losses to 1.5341 to the dollar after closing at 1.5230 yesterday. The currency rose to 1.52 earlier today. The Turkish stock index fell 0.1 percent to 64,373.26 points.
"We believe scope for any further easing is quite limited and that the central bank is playing a very risky game by cutting interest rates when domestic demand is still growing robustly," said RBC Capital Markets in a note.
(Reporting by Alexandra Hudson and Seda Sezer)