* Seven-fold rise in current account deficit in July
* Strong portfolio inflows show investor interest still high
* Finance Minister says worries over spending misplaced
* Economy Minister sees c/a deficit at 5 pct of GDP in 2010
(Adds details, Economy Minister)
By Alexandra Hudson and Selcuk Gokoluk
ANKARA/ISTANBUL, Sept 15 (Reuters) - Turkey's stellar growth fuelled another large rise in its current account deficit in July, while the government sought to reassure investors about the budget, pointing to a surplus in August.
Turkey has staged an impressive come-back from a contraction of 4.7 percent last year, enjoying one of the developing world's highest growth rates with expansion forecast at 6-7 percent in 2010, an outlook which has propelled stocks to an all-time high.
But with growth has come a spiralling current account deficit, largely due to the trade deficit, and while Turkey has so far been able to tap external financing it is vulnerable to external shocks.
With the pace of global economic recovery uncertain, some warn gripes such as the size of the current account deficit, or the government's decision to shelve new rules on budget discipline could take the shine off Turkey.
The OECD on Wednesday urged Ankara to implement the budget plans as soon as possible, finish withdrawing crisis-induced stimulus measures and begin "normalising" interest rates by the end of 2010.
Analysts do not expect the central bank to start raising interest rates before next year.
"As the monetary policy stance is expansionary, the recovery is firming and credit accelerates, the central bank should start normalising interest rates before the end of 2010, conditional on a favourable economic outlook," the OECD said in its latest report on Turkey.
Finance Minister Mehmet Simsek said that the government had no intention of loosening the purse strings prior to an election due by July 2011, adding the budget deficit had fallen by 50 percent in the first eight months of 2010.
He said the budget had posted a surplus of 3.09 billion lira in August, up from a deficit of 2.046 billion lira in July.
Turkey's strong approval in a referendum on Sunday of government-backed reforms to the constitution has also eased some concerns over the risk of higher spending.
Economy Minister Ali Babacan told a press conference this year's debt-to-GDP ratio would fall to 43-44 percent from 2009's 45.5 percent, while the current account deficit at a likely 5 percent of GDP would not pose problems.
FRAGILE
Central bank data on Wednesday showed the current account deficit rose seven-fold to $3.44 billion, well above the forecast in a Reuters poll for a deficit of $2.95 billion.
In the first seven months of the year the deficit widened to $24.23 billion, more than tripling from the same period in 2009, as energy prices rose and domestic demand drove much stronger import growth than export growth.
"Foreign direct investment picked up but financing remains fragile," said Fazil Zobu, director of research at TEB.
Portfolio inflows looked extremely strong, but such inflows are sensitive to speculative activity and global sentiment.
"Turkey's external financing position remains its Achilles heel... The widening in the current account deficit is perhaps understandable given the strength of the economic rebound, i.e. 11 percent , and also the higher level of oil/commodity prices," said Timothy Ash at Royal Bank of Scotland.
"On the debt financing front though, Turkey has proven its much greater ability to roll (over) its liabilities in times of crisis and, arguably, greater willingness to pay as compared to its peers," he added.
Expansion has helped the labour market, as data showed the unemployment rate falling to 10.5 percent in the May to July period from 11 percent in the April to June period.
So far markets have taken the rising current account in their stride, focusing instead on the Turkey's growth story. (Editing by Patrick Graham)