* Economy minister Simsek sees signs of IMF flexibility
* Simsek says if IMF deal reached, most likely after polls
* IMF makes modified reform proposals, ready for talks
* Government sources say tax cuts planned
(Adds comment from PM Erdogan, market rebound)
By Hatice Aydogdu and Orhan Coskun
ANKARA, March 12 (Reuters) - The International Monetary Fund has started to show flexibility on some subjects in talks with Turkey on a loan accord, Economy Minister Mehmet Simsek said on Thursday, raising hopes of a deal to boost the ailing economy.
Market optimism on a deal was further encouraged by comments from the IMF which said the Fund was ready to resume negotiations after conveying modified proposals to Ankara, taking into account Turkey's concerns.
The protracted IMF talks were officially suspended in January due to disagreements over the terms of a loan -- funds seen as necessary as the $750 billion emerging market economy struggles to weather the global economic crisis.
In response, the lira
Any deal is now only expected after municipal elections on March 29 in the European Union membership candidate country. In the meantime, a stimulus package is planned to revive demand, government sources told Reuters on Thursday.
"A programme will be created if a path can be agreed with the IMF. If everything is not agreed immediately it will probably be after the elections," Simsek said in an interview with broadcaster CNN Turk.
Turkish financial markets and business leaders, worried about the economic outlook, are clamouring for a new loan deal to replace the $10 billion accord which expired last May. But Prime Minister Tayyip Erdogan launched an attack on doomsayers on Thursday for undermining public confidence in the outlook.
"There are some who continuously demoralise people as if the source of this crisis is Turkey. Those who harm the psychology of people are committing treason against the country," he told an election rally for his ruling AK Party in southern Turkey.
MODIFIED POLICY PROPOSALS
The IMF has been pushing for tighter spending, while the government fears reduced spending will exacerbate unemployment, already at a 5-year high above 12 percent, and it seeks more flexible fiscal policies to stimulate growth.
IMF comments on Thursday pointed to efforts to overcome those differences.
"In response to specific concerns raised by the Prime Minister, in order to facilitate progress, the Fund has recently conveyed to the authorities a modified set of policy and reform proposals," IMF spokesman David Hawley said.
Turkey's economy, which has boomed in the years since a 2001 financial crisis, began slowing sharply last year and is believed to be heading towards recession in 2009 as domestic and export demand slump.
Turkey has until now balked at demands by the IMF to give autonomous status to the country's tax administration, to press taxpayers to declare the source of their incomes and to cancel a law for transferring funds to the municipalities.
Radical changes in the tax administration would deepen the crisis as it would discourage the flow of funds, said Simsek, who was due to fly to Britain on Thursday for the G20 summit.
Simsek added that Turkey was working on a new mechanism to encourage bank lending and would announce it in a few weeks.
The central bank has cut its key borrowing rate by 525 basis points since November to 11.50 percent and more cuts are expected as it looks to encourage economic activity.
The extent of the slowdown in the Turkish economy was illustrated by data this week showing industrial production had slumped by more than 20 percent year-on-year in January, which helped send the lira to a record low against the dollar.
Government sources told Reuters Turkey planned to cut value-added tax and special consumption tax in the automotive, construction and textile sectors temporarily under a stimulus package set to be completed next week.
The automotive sector has stood out among hardest hit sectors during the current slowdown. Industry data this week showed automotive output and exports slumped more than 60 percent year-on-year in the first two months of 2009. (Writing by Daren Butler, Editing by Ron Askew, Andy Bruce and Toby Chopra)