* Report of imminent IMF deal sets Turkish markets racing
* Doubts set in after comments by Turkish and IMF officials (Updates with markets, adds quotes from AKP officials)
By Selcuk Gokoluk
ANKARA, Dec 31 (Reuters) - Talks between Turkey and the IMF over a possible stand-by loan arrangement were progressing, a ruling party official said on Thursday, following a newspaper report that Prime Minister Tayyip Erdogan had told his party leadership that the Fund had accepted Turkey's terms.
Turkish bonds and the lira rallied strongly following the report in the Milliyet newspaper, while share prices swept to highs for 2009 on optimism that a deal was imminent.
The lira and the share market gave up some gains later after comments by the deputy party chairman of Erdogan's party and an IMF spokeswoman in Washington raised doubts about how far negotiations had advanced.
"We have thoroughly discussed with the Turkish authorities the policies that could be supported by an IMF program," the IMF spokeswoman said.
"If the authorities decide to request a negotiating mission, we could field one in short order."
Analysts say Turkey's economic recovery would be less strong next year without an IMF deal in place because the pressure to finance public debt would crowd out the private sector.
Most analysts regarded concern that the government could become lax reining in its fiscal deficit in the absence of an IMF deal as one of the top risks to the economy.
Investors had become doubtful about prospects for an accord, but remarks by Economy Minister Ali Babacan revived hopes earlier this week.
CONFLICTING ACCOUNTS
The Milliyet newspaper quoted unnamed AK Party officials as saying that Erdogan had said a deal would be clinched as the IMF had conceded to Turkey on key sticking points.
The previous stand-by loan accord for $10 billion expired in May 2008, and investors had hoped for a three-year deal worth up to $50 billion, but the government baulked at IMF conditions.
"Turkey's conditions have been accepted," Erdogan was quoted as telling his party's executive board on Wednesday night.
The newspaper said Erdogan said that the IMF had wanted a three-year deal but his government had insisted on two years.
Citing ruling AK Party sources, the paper said the deal was expected to be signed in January, but at a news conference on Thursday, party Deputy Chairman Abdulkadir Aksu said Erdogan had only told the meeting that talks were progressing .
"The prime minister said the talks between the IMF and Ali Babacan are continuing and they are in positive direction. There were no further deliberations," Aksu said.
Another AKP official, who declined to be identified, backed Aksu's account.
"The prime minister did not say whether a deal is certain with the IMF," the official told Reuters.
After the newspaper report, the main share index <.XU100> hit a high for 2009 of 53,126.22 points, but gave back some gains to close 2.24 percent up at 52,825.02.
The lira
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The markets are expected to remain sensitive to news regarding the IMF negotiations.
"We expect to hear more on the topic in the coming days. Since very few players actually expected a deal, we think that the market impact will be significant," JP Morgan Chase analyst Yarkin Cebeci said in a note.
"By stating that the IMF accepted all conditions put forward by Turkey, Erdogan is most probably trying to sell the IMF deal idea first to his fellow party members. He is likely to use the same rhetoric while talking to the public," Cebeci said.
Turkey is scheduled to hold elections in mid-2011 and the government is seeking to avoid the IMF's austere terms such as price hikes and pay cuts.
The global lender is unpopular with Turks, who have seen their country enter loan accords with the IMF 19 times before.
Babacan said on Tuesday Turkey and the IMF have agreed that a loan deal they might sign next year would be for two years, but austere terms that might hamper economic recovery would be unacceptable.
Economists say Turkey does not need IMF cash desperately as its external deficits shrank this year. (Additional reporting by Pinar Aydinli in Ankara and Leslie Wroughton in Washington; Editing by Simon Cameron-Moore and Kenneth Barry)