May 2 (Bloomberg) -- Turkish stocks and bonds rose after Prime Minister Recep Tayyip Erdogan called early general elections to ease tensions with the military and proposed changes to the constitution.

Yields on lira-denominated government debt maturing in February 2009 fell 11 basis points to 19.14 percent at 5:56 p.m. in Istanbul. The ISE National 100 Index closed up 1.7 percent. The lira fell 0.4 percent to 1.3613 against the dollar after rising 0.6 percent last night.

Investors fled Turkish assets the first two days of this week after the military threatened to block the presidential candidacy of Foreign Minister Abdullah Gul, a former member of the banned pro-Islamic Welfare Party. Erdogan proposed bringing elections forward to June 24 from November and also changing the law so the head of state is chosen in a popular vote.

``Political risk is lower now as compared with Monday,'' said Mehmet Ilgen, a trader at Ata Invest. ``The country's civil institutions showed that they can find a solution through democratic means. So, there's relief in the markets.''

The main share index fell 7.1 percent in the first two days of the week and yields on government debt rose 92 basis points to 19.25 percent. Leading today's rally on the stock market were Tupras Turkiye Petrol Rafineleri AS, the biggest oil refiner, and Eregli Demir & Celik Fabrikalari TAS, the biggest steelmaker. Tupras rose 3.7 percent to 28.25 liras while Eregli rose 4 percent to 15.7 liras.

Constitutional Changes

The Constitutional Court ruled yesterday that a first round of presidential voting on April 27 was invalid because the number of lawmakers present was less than two-thirds of parliament. The secular opposition boycotted the balloting and brought the issue to the court.

Erdogan today called the court's ruling a ``bullet'' fired against democracy and said he would call an early national election to renew the government's legitimacy. The voting will be held on June 24, Sadullah Ergin, deputy chief of the governing party's group in parliament, said in a telephone interview.

The ruling Justice and Development Party or AKP will also propose that the 550-member parliament change the constitution to allow for direct instead of parliamentary elections for president, Erdogan said. Ergin said those changes are expected by May 6.

Gul, the ruling party's candidate, came within 10 votes of becoming president in the first ballot. The night after the vote, the military issued a statement warning that ``it must not be forgotten that the armed forces are the determined defenders of secularism.'' On Sunday, hundreds of thousands of people rallied in Istanbul to protest Gul's candidacy.

Unity Call

The government has refused to withdraw Gul's candidacy. President Ahmet Necdet Sezer's term ends May 16.

Erdogan, who was also a member of the banned Welfare Party, sought to calm tensions, calling for ``unity, togetherness and solidarity'' in a televised address to the nation on April 30.

EU Enlargement Commissioner Olli Rehn on April 28 warned that the army's reaction was a ``clear test case'' of whether it could respect the 27-nation bloc's ``democratic values.''

Erdogan's government, since taking power in 2002, has narrowed the budget deficit and cut government debt as a proportion of economic output under a $10-billion International Monetary Fund loan package. It also allowed broadcasting in Kurdish, changes aimed at winning a start to European Union membership talks in October 2005.

Economic Growth

``Overall, Turkey is a thumbs-up story,'' said Harald Eggerstedt, a fund manager at Cominvest Asset Management in Frankfurt where he helps manage $42 billion and is invested in Turkey. ``Both the markets and the economy are in a good shape. And this is not only, as many investors point out, due to expectations that they will profit from EU membership, should it happen. It's because they have been making the right moves over the past couple of years.''

Before this week's decline, the lira had gained 6.1 percent in 2007 and the benchmark National 100 Index of the biggest stocks was up 20 percent.

Turkey's economic growth has averaged 7 percent a year since 2002, compared with 1.6 percent in the countries sharing the euro. The country attracted a record $19.8 billion in foreign investment last year, twice the previous year's figure and another $11 billion in the first quarter of this year.

After his nomination, Gul stressed that he would maintain the country's secular values.

The presidency is largely a ceremonial and deeply symbolic role in Turkey. It was established eight decades ago after the Ottoman Empire collapsed. The president has the power to veto legislation that is judged to conflict with the constitution, a role that Sezer, a staunch secularist, repeatedly used.

To contact the reporter on this story: Steve Bryant in Ankara at Sbryant5@bloomberg.net.

Last Updated: May 2, 2007 11:09 EDT