By Natsuko Waki
LONDON, Feb 25 (Reuters) - Turkey's lira hit two-week lows versus the dollar on Tuesday while stocks tumbled 2.5 percent after the latest twist in a government corruption scandal, while concerns about Chinese yuan moves weighed on other emerging assets.
Ukraine's hryvnia hit a fresh five-year low but its sovereign dollar bonds held most of Monday's stellar gains as hopes grew that the country would receive Western aid, including from the IMF, which encourages greater exchange rate flexibility.
Voice recordings were posted on YouTube late on Monday purportedly of Turkish Prime Minister Tayyip Erdogan telling his son to dispose of large sums of money on the day news broke of a graft inquiry into his government.
The incident comes at a sensitive time for Erdogan, whose AK Party officially began campaigning for local elections at the end of March. Erdogan's office said the recordings were fake.
And external conditions are not supportive for Turkey either as the Federal Reserve plans to continuing reducing its monetary stimulus, in the so-called tapering process.
"In Turkey you have the tapering worries but you also have a layer of political risk on top. In a sense what's happening today is a continuation of themes that have been running for a while," said HSBC emerging equity strategy head John Lomax.
The lira fell 0.6 percent to 2.2096 per dollar while local stocks fell more than 3 percent at one point. Turkey's benchmark two-year government bond fell a third of a percent in price, pushing yields to 10.95 percent
Emerging market investors were also closely watching the Chinese yuan, which fell beyond the official midpoint rate for the first time since September 2012. The moves are linked to Beijing's plans to usher in more reforms including lending curbs and a widening of the currency band.
Spot yuan has entered a dramatic weakening cycle in recent weeks, with traders saying the recent depreciation is intended to set the stage for widening the band to 2 percent or more from 1 percent.
"China is preparing to widen the daily trading band and they are trying to prepare the market by increasing two way volatility in the exchange rate," said Flemming Nielsen, analyst at Danske Bank in Copenhagen.
"As we have seen, the two major drivers for emerging markets have been Fed tapering and slower growth in China. It is difficult to call the bottom for emerging markets as long as we cant call a bottom in China."
The broader benchmark MSCI emerging index fell 0.1 percent, weighed down by China's CSI300 share index which fell 2.6 percent.
The index suffered its largest one-day loss in seven months on renewed credit worries and a sharp drop in the yuan.
The yuan was trading at 6.1228, much softer than the midpoint which was set at 6.1184.
Reforms in the foreign exchange market, as well as the property sector, may be announced at the National People's Congress, the March meeting of China's rubber-stamp parliament.
"We believe that reforms and liberalization remain a key focus," Barclays Capital said in a note to clients.
The bank expects the congress to emphasize reform and innovation to unleash new growth drivers, while maintaining macro targets and policies to safeguard stability.
The hryvnia fell more than 3 percent to 9.4460 per dollar as expectations grew that the country will get aid from Western donors including the International Monetary Fund.
IMF aid programmes typically encourage greater exchange rate flexibility, and a floating hryvnia was a key pre-condition the fund sought to renew its loan package to Ukraine. Many reckon the hryvnia move sets the stage for an IMF deal.
Ukraine's sovereign dollar bonds maturing in 2014 and from 2017 all the way to 2023 all fell around 1 cent to the dollar, having rallied up to 10 points on Monday. Ukraine's stocks added more than 3 percent to hit a fresh 1-1/2 year high after soaring 15 percent on Monday.
Forward currency markets are pricing in the hryvnia trading at 10.47 in six months, a depreciation of nearly 10 percent from current levels.
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