The Turkish lira recovered to below 1.70 levels from early losses against the U.S dollar after the chances of an IMF deal increased and the central bank reduced foreign exchange borrowing costs. (UPDATED)

In early morning trade the lira hovered just below key 1.74 levels against the U.S. currency, weakening almost 3.5 percent lower than a closing level of 1.6785 on Wednesday, after the Turkish Central Bank cut borrowing and lending interest rates unexpectedly.

The Turkish Central Bank cut its borrowing rate 50 basis points to 16.25 percent and reduced its lending rate by 100 percent to 18.75 percent.

The lira later recovered after media reports said an International Monetary Fund (IMF) agreement with $20-$40 billion in aid was possible citing Turkish Prime Minister Tayyip Erdogan and the central bank's move to reduce foreign exchange borrowing costs in order to improve foreign currency liquidity.

"Talks are continuing. The conditions are on the verge of being agreed. There are not many problems remaining. There could be an agreement any moment," Radikal daily reported Erdogan as telling his AKP’s central executive board on Wednesday evening.

Turkey and the IMF have been locked in negotiations for fresh funding but disagreement on issues such as spending by municipalities has hampered progress.

Turkey's $10 billion loan accord with the IMF expired in May and business leaders have been calling for a fresh agreement to boost the flagging economy.

In a separate move which also boosted the lira against the dollar, the Turkish Central Bank said the maturity of foreign exchange transactions in the foreign exchange depot market had been lengthened from one to four weeks, while the central bank foreign exchange lending rate (for the specified limits of the banks), which was 10 percent, was reduced to 7 percent for U.S. dollar and 9 percent for the euro.

The lira has lost around a third of its value this year since the global financial turmoil triggered an intense emerging market asset sell-off.