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* Investors hoped Erdogan will calm concerns
* Statement points to Erdogan's rates sensitivity
* Government stresses central bank independence
* Lira off record lows as current account deficit narrows
By Daren Butler and Ece Toksabay
ISTANBUL, March 11 (Reuters) - Nervous Turkish markets hoped President Tayyip Erdogan might make peace with the central bank governor on Wednesday, but the two seem likely at best to have agreed to disagree on interest rate policy.
Erdogan's demands for a sharp rate cut to boost economic growth before a June election, even though inflation remains high, have helped to send the lira to record lows and raised concern about the bank's independence.
Unable to raise rates to defend the Turkish currency, Governor Erdem Basci has resorted to tweaking policy on the margins, with limited success.
Basci met Erdogan for two hours on Wednesday in an apparent bid to explain his monetary policy. Erdogan's office made a statement after the meeting, which underlined their differences.
"In the meeting that pointed to Turkey's strong economic fundamentals, policies implemented in line with strong and balanced growth targets, as well as Mr. President's sensitivities regarding interest rates and economic output were emphasised," the statement said.
The central bank published Basci's 130-page presentation on its website but the document consisted largely of graphs explaining trends in the Turkish economy with little commentary.
One page described the view that policies focused on price stability and fiscal discipline were needed in order to decrease interest rates.
Erdogan has previously denounced defenders of high interest rates as "traitors", suggesting the chances of forging any common understanding are slim.
The lira was boosted on Wednesday by data showing a lower-than-expected current account deficit in January, strengthening it to 2.6133 against the dollar after market hours from Friday's all-time low of 2.6470.
Turkey relies on foreign capital inflows to finance the deficit, its main economic vulnerability, particularly when overseas investors pull back.
"As we speak we have been taking profit quite actively in the run-up to the elections and political temperatures have risen," said Anthony Cragg, Emerging Markets Senior Portfolio Manager at Wells Fargo Asset Management.
"The concern out there, which is not unique to us, is of government interference particularly in monetary policy. It looks like the president is leaning on the central bank to cut rates at a time when they should not be cutting," he said. "For now that's enough to worry investors."
Basci, a former professor respected for his command of economic theory, is unlikely to yield to the sort of rate cuts Erdogan wants, particularly with inflation running well above the bank's 5 percent target.
But Erdogan is wedded to the idea that high rates cause high inflation, and his criticism of the central bank goes down well with industrialists who have grown rich during his time in power and supported more than a decade of electoral success.
The weakness of the lira, which is down around 12 percent against the dollar this year, is however starting to hit the pockets of ordinary Turks, something the ruling AK Party will be keen to avoid as the parliamentary election approaches.
"Obviously we're feeling it... the local merchants follow the lira very closely and put their prices up. Everyone is doing it," said retired businesswoman Nesrin, 55, shopping with her daughter-in-law on one of Ankara's main commercial streets.
Another Deputy Prime Minister, Numan Kurtulmus, tried to calm such worries on Wednesday, telling reporters that the Turkish economy was "extremely well prepared for volatility".
Basci, Prime Minister Ahmet Davutoglu and cabinet ministers held an eight-hour meeting on the economy on Tuesday, after which the government promised measures to boost industrial production and employment as it seeks to accelerate growth.
In a statement it also stressed the central bank's independence.
The bank said on Tuesday it would adjust its reserve requirements - used to control the amount of dollars in the market - to boost foreign exchange liquidity temporarily by about $1.5 billion over the next few weeks.
Turkish shares and bonds rebounded with the lira. The main stock index, which tumbled 3.3 percent on Tuesday, was up 0.6 percent. The benchmark 10-year government bond yield fell to 8.33 percent from 8.39 percent on Tuesday.
The cost of insuring exposure to Turkish debt edged back from 11-month highs, with Turkey's 5-year credit default swaps (CDS) dipping to 224 basis points from a close of 227, according to data from Markit. (Additional reporting by Jonny Hogg and Tulay Karadeniz in Ankara, Sujata Rao in London; Writing by Daren Butler and Nick Tattersall; editing by David Stamp/Ruth Pitchford)