ISTANBUL, Sept 1(Reuters) - Turkey's lira weakened on Monday as a deepening crisis in Ukraine rattled investors, but the formation of a cabinet that signalled policy continuity was expected to soothe markets in the short run.
Ukrainian President Petro Poroshenko warned a "full-scale war" was imminent if Russian troops continued to advance in support of pro-Moscow rebels, while Russian President Vladimir Putin called on Sunday for immediate talks on the "statehood" of southern and eastern Ukraine.
But some analysts said the formation of a new Turkish cabinet on Friday, with Deputy Prime Minister Ali Babacan to continue to oversee economic policy, could boost the lira.
"We think this would lead the local political tension over more populist policies leading to rating downgrade to ease for the short term," a note from Erkin Isik, strategist at TEB-BNP Paribas said.
"Despite geopolitical risks, especially over Ukraine, continuing to exert volatility to markets, we think this could reverse the relatively weaker performance of the lira against emerging market peers in the recent period."
The lira slipped to 2.1625 against the dollar by 0809 GMT from 2.1596 late on Friday.
A long-awaited but marginal improvement in the manufacturing sector failed to boost the lira.
Istanbul's main share index inched up 0.16 percent to 80,444 points after PMI data showed that Turkish manufacturing activity grew slightly in August after two months of contraction, but lagged the 0.23 percent rise in the broader emerging markets index.
Moody's downgraded Bank Asya for the second time in two weeks on Friday but shares did not move because the stock was already suspended.
The ratings agency downgraded its long-term deposit rating to Caa1 from B2, and placed it on review for downgrade, for fear of further deposit volatility and the uncertainty over the bank's ownership.
State bank Ziraat scrapped talks to acquire Bank Asya last month, causing concerns over the Islamic lender's future to deepen.
The benchmark 10-year government bond yield fell to 9.11 percent from 9.13 percent on Friday. (Reporting by Dasha Afanasieva; Editing by Daren Butler and Tom Heneghan)