March 20 (Reuters) - Turkey's banking index

extended losses to slide more than 4.5% on Thursday amid growing

concerns that the central bank may delay or pause future

interest rate cuts following Wednesday's sharp lira tumble.

Turkish stocks rose 1% after plunging on Wednesday following

the detention of President Tayyip Erdogan's main political

rival, while the lira held flat.

After opening 0.6% higher, the benchmark BIST-100

stock index was volatile, trading up 0.97% at 1048 GMT.

The main BIST 100 share index closed 8.72% lower at

9,860.29 points on Wednesday.

The lira traded at 38.0000 against the U.S.

dollar at 1048 GMT. On Wednesday, the lira tumbled to a record

low of 42 per dollar before recouping most of the day's losses,

after authorities detained the mayor of Istanbul, Ekrem

Imamoglu.

The banking index initially dropped 1.68% in early trade

before selling pressure intensified. It plunged as much as 5.9%

by 0725 GMT before paring some losses to trade 2% lower at 0835

GMT.

The banking index traded down 4.6% at 1048 GMT.

Bankers calculate that the Turkish central bank sold a

minimum of $5 billion in FX after the lira's crash, while some

say it may have already reached $10 billion for the day.

Serhat Baskurt, head of algorithmic trading at ALB Yatirim,

attributed the decline in banking stocks to fading rate-cut

expectations following the central bank's FX sale.

"The central bank sold around $8-9 billion after strong FX

demand yesterday. There is still uncertainty about whether this

demand will persist. If FX demand continues and carry trade

outflows accelerate, the expectation for an April rate cut could

shift towards a hold. In fact, I believe an implicit rate hike

might even be on the table," Baskurt said.

He noted that selling pressure was concentrated in banks

with significant foreign investor positions.

Yusuf Dogan, treasury director at Trive Menkul Degerler,

said any delay or pause in the expected monetary easing cycle in

2025 could disrupt the projected 200-400 basis point recovery in

banks' net interest margins.

He added that such a scenario could also put at risk the

rebound in return on equity, which has been a key driver behind

the banking sector's more than 20% rally since the monetary

easing cycle began in December.

International bonds issued by Turkey's government clawed

back some of the previous session's losses. Longer-dated

maturities were up as much as 0.7 cents with the 2045 bond bid

at 86.026 cents on the dollar, retracing more than half of

Wednesday's decline, Tradeweb data showed.