By Ercan Gurses and Orhan Coskun
ANKARA (Reuters) - Turkey's nationalist opposition rejected a coalition with the ruling AK Party and refused to support a minority government on Monday, further complicating Prime Minister Ahmet Davutoglu's efforts to break a debilitating political deadlock.
The breakdown in talks between the nationalists and Davutoglu's AKP raises the likelihood of a fractious multi-party interim government, more unwelcome news for jittery investors who have sent the lira currency to a series of record lows.
The AKP failed to hold onto its majority in an election on June 7, leaving it unable to govern alone for the first time since coming to power in 2002. That plunged Turkey into the kind of political uncertainty not seen since the fragile coalitions of the 1990s.
The deadlock also comes as the NATO member faces a confluence of national security threats, battling Islamic State insurgents on its borders and Kurdish militants at home.
After meeting with Nationalist Movement Party (MHP) leader Devlet Bahceli for more than two hours, Davutoglu said the two men had been unable to find common ground.
"It was not possible to realize any of the options in my mind during the meeting today with Bahceli," Davutoglu told a news conference in the capital, Ankara.
"The current state of affairs does not point to the possibility of a coalition. I will return the mandate if necessary after discussing it with the president."
In a statement a few hours later, Bahceli echoed Davutoglu, adding the likelihood of Turkey forming a coalition government has "diminished greatly". "Turkey now faces the repeat of June 7 election," he said. "MHP has previously expressed that it doesn't view a new election positively."
President Tayyip Erdogan has made little secret of his preference for single-party rule and hopes that a new election would give the AK Party he founded an opportunity to win back its majority. But senior party officials had hoped the AKP would lead the country to those polls alone.
Under the terms of the constitution, Erdogan could dissolve Davutoglu's caretaker cabinet and call for the formation of an interim "election government" if no deal is reached by Aug. 23. That would mean power being shared between all four parties before an election in the autumn.
Senior AKP officials had been betting that the nationalists, virulently opposed to greater Kurdish political power, would do anything possible to avoid such a scenario, which would see the pro-Kurdish Peoples' Democratic Party (HDP) hold cabinet seats.
In his statement, Bahceli also said his party will not take part in such an election government.
The main opposition CHP said it should now be given the mandate to form a new government. But to do so it would need the support of both the MHP and the HDP, which looks highly unlikely.
Davutoglu said Bahceli had also made clear his party would vote against any proposal for the current government to lead Turkey to an early election if it were to be put before parliament, making it difficult for Davutoglu to resolve the crisis before the Aug. 23 deadline.
The news sent the lira to a record low of 2.8680 against the dollar.
"The fact that the uncertainty continues means the pressure on the market and on the overall outlook economically will continue," said Gizem Oztok Altinsac, chief economist at Garanti Securities.
(Additional reporting by Humeyra Pamuk, Ece Toksabay and Nevzat Devranoglu; Writing by Nick Tattersall and David Dolan, editing by Larry King)