By Daren Butler and Evrim Ergin

ISTANBUL (Reuters) - Turkey launched construction on Wednesday of a third bridge linking its European and Asian shores, the latest in a slew of multi-billion dollar projects that Prime Minister Tayyip Erdogan sees as embodying its emergence as a major power.

Erdogan, who has led a decade-long transformation of a once crisis-prone economy into Europe's fastest growing, has prioritized the building frenzy as the nation's infrastructure struggles to keep up with its growth.

With an eye to an election cycle ending in parliamentary polls in 2015, Erdogan called on the Turkish, Italian and Korean firms involved to complete the Istanbul bridge within two years.

"This is how we are building a powerful Turkey," he told a crowd of several thousand people, some waving Turkish flags, who gathered at a construction site on the shores of the Bosphorus strait to the north of Europe's largest city.

"For the seven hills of Istanbul, we have seven grand projects, one is this bridge, a third necklace over the Bosphorus," he said of the $3 billion project, set to be the world's widest and longest combined road and rail bridge.

A huge 150 billion lira ($80 billion) is being invested in projects including a third Istanbul airport, billed to be one of the world's biggest, as well as rail and road tunnels under the Bosphorus, a high-speed train line to the capital Ankara and a shipping canal designed to rival Panama or Suez.

The bridge is meant to ease congestion in the city of 14 million people. Its population was less than 2.5 million when the first Bosphorus Bridge was opened to traffic in 1973.

With the population forecast to hit 17 million and the number of vehicles seen rising to 4.4 million from 3 million within a decade, the government is under pressure to act fast.

Environmental groups have said the highway and airport projects will cause significant damage, leading to the destruction of hundreds of thousands of trees and harming natural water basins, accusations rejected by Erdogan.

OTTOMAN LEGACY

Wednesday's ceremony, timed to coincide with the 560th anniversary of Istanbul's conquest by Sultan Mehmed the Conqueror, harked back frequently to the Ottoman Empire, which crumbled to be replaced by modern Turkey 90 years ago.

Such references have become commonplace under Erdogan's rule as the country regains prominence across the Middle East, encouraging critics of the authoritarian prime minister to accuse him of behaving like a modern-day sultan.

Hundreds of military officers have been jailed on charges of plotting a coup against Erdogan; others including academics, journalists and politicians are facing trial on similar accusations.

Barred from running for prime minister again, Erdogan is widely expected to bid for a newly empowered presidency in an election next year, cementing his status as Turkey's most significant leader since Mustafa Kemal Ataturk, founder of the modern secular republic.

Erdogan frequently embraces Istanbul's imperial past, when the Ottoman Empire sprawled across three continents.

"In all the lands where they were present, the Ottomans left behind creations which conquered the people's hearts. Just like our ancestors we are continuing to write history and leave behind creations," he said.

An Ottoman military band banged drums and smashed cymbals while Erdogan, President Abdullah Gul and their wives said a Muslim prayer before launching the project near the village of Garipce on the European side of the city.

The bridge will be named Yavuz Sultan Selim, commonly known in English as Selim the Grim, whose 16th century reign brought huge expansion in the Ottoman Empire and dominance across the Middle East.

($1 = 1.8580 Turkish liras)

(Writing by Daren Butler; Editing by Nick Tattersall and Alison Williams)