The Turkish lira jumped, but then shed half its gains, on Wednesday after the central bank ramped up interest rates in an aggressive defence closely watched on emerging markets.
The central bank defied political pressure to double a key interest rate to 10.0 percent to try and a slide in the value of the currency.
The hike also a pre-emptive move against any tightening of US monetary policy later in the day, which could suck money out of emerging economies.
The lira leapt by about 3.0 percent overnight in response to the central bank's U turn.
But during trading on Wednesday, the lira had lost half its gains. Before the decision it was at 2.25 to the dollar, it then shot up to 2.17 to the dollar, but later was down to 2.23.
But it was still well above the record low of 2.39 to the dollar it reached at one point on Monday.
The lira also slipped from its high point overnight to 3.0467 to the euro compared with 3.09 before the decision.
The Istanbul stock exchange lost by 1.0 percent to 62,906.61 points.
Asian and European stocks rose on Wednesday, with the Turkish providing a shot of confidence amid turmoil in emerging markets.
Ali Cakiroglu, senior investment strategist at HSBC bank, commented that the fluctuations in the Turkish currency could remain severe for a while, adding that the US Federal Reserve's decision later in the day would be "influential".
Turkey's benchmark two-year government bond yields dropped to 10.79 percent, and 10-year yields were at 9.98 percent, he added.
Analysts say policymakers in other emerging economies will closely watch the effects of the Turkish move, with the US Federal Reserve central bank due to say later in the day if it will reduce further its huge stimulus to the US economy.
They also said that the Turkish decision would help to restore credibility to the central bank, damaged by months of government pressure to avoid raising rates.
The change of policy set Turkey's central bank in direct confrontation with Prime Minister Recep Tayyip Erdogan.
The prime minister has made a turnaround in Turkey's economic fortunes a keystone of his 11-year stint, and only hours before the decision he warned that the bank would be responsible for any ensuing slowdown in growth.
But in the end the bank increased its overnight lending rate to 12 percent from 7.75 percent, the overnight borrowing rate from 3.5 percent to 8.0 percent, and the pivotal one-week repo rate to 10.0 percent from 4.5 percent.
Charles Movit, economist at IHS Global Insight, said the central bank opted for a "bold stance" that should convince the markets but warned that the uncertainities rooted in an election cycle beginning in March and global turbulances could threaten the lira.
"The evolving political situation or volatility in global capital markets could undermine the lira again despite the central bank's new-found independence," he said.
Fed tapering hits emerging markets
The currencies of emerging economies have taken a severe beating recently, due in part to US Federal Reserve policy reducing stimulus measures. This tends to suck cash out of emerging markets back to the United States.
The Turkish currency has lost about 10 percent since mid-December, when a corruption scandal roiling key Erdogan allies became public.
On Tuesday, the central bank of India announced a surprise decision to raise its key rate by a quarter of a point to 8.0 percent. Among other emerging countries in currency turmoil are Argentina, South Africa, and Russia.
The Fed tapering "hits countries that tend to fund their deficits with short term money flows like Turkey," said Kathleen Brooks, research director at Forex.com.
Brooks listed Turkey among those countries with shaky economic fundamentals, particularly current account deficits, along with India, Indonesia, South Africa and Thailand.
Minister praises rate rise
His finance minister, Mehmet Simsek, declined to criticise the central bank's decision, because he said the bank's credibility was "critical".
"If they made such a decision, I am sure it is the best one," he told Turkish television.
"The central bank is doing well in a climate of global problems," he said, adding that "the central bank decision has eliminated investors' concerns to a significant extent".
Erdogan's government wants rates held down to sustain growth ahead of an election cycle beginning with March local polls.
Until now, the bank has avoided a sharp rise in the base rate, using a big increase in the overnight rate and intervening heavily on the foreign exchange market, spending much of its foreign exchange reserves but failing to stem the slide of the lira.