* Lira eases as industrial output misses f'cast

* Shares, bond yields down

* Dec industrial production down 3.8 pct y/y

By Seltem Iyigun

ISTANBUL, Feb 8 (Reuters) - The Turkish lira and shares slipped on Friday on feeble December industrial output data that pointed to continued economic weakness and supported expectations monetary policy will be eased.

Turkish industrial production fell 3.8 percent year-on-year in December, data from the Turkish Statistics Institute showed, well below economists' forecasts of a flat reading.

Adjusted for seasonal and calendar effects, industrial production fell 1.5 percent from a month earlier.

Following the data, the lira eased to 1.7749 to the dollar, from 1.7720 late on Thursday. By 0903 GMT, it stood at 1.7722. Against its euro-dollar basket TRYBASKETD3= the currency weakened to 2.0744 from 2.0717.

"The data showed the slowdown in economic activity continued in the last month of 2012. This is an old data (but) it may strengthen rate cut expectations in the market," said Ali Cakiroglu, senior investment strategist at HSBC Asset Management in Turkey.

"The general expectation from the central bank is that it will cut the overnight borrowing rate at its meeting in February. After today's data, hopes of a cut in the lending rate may rise," he added.

The central bank last month reduced its overnight borrowing rate to 4.75 percent from 5 percent and its lending rate to 8.75 percent from 9 percent. ID:nL6N0AR7BO

Expectations the central bank will lower rates at its policy meeting on Feb. 19 rose after the lira's real effective exchange rate climbed above 120, a level the central bank said in November would prompt it to make "measured" interest rate cuts.

ID:nL5N0B64BR

The yield on Turkey's two-year benchmark bond

tTR070115TV0=IS inched up to 5.68 percent, from Thursday's close at 5.65 percent. It hit its lowest-ever level of 5.63 percent on Thursday.

Istanbul's main share index .XU100 was down 0.24 percent at 77,971 points, close to its lowest level since end-2012. The global emerging markets index .MSCIEF was up 0.01 percent.

"Shares have risen sharply since the start of the year, so investors pull back. The fall may continue for a while; however, we expect the index to rise again as long as interest rates continue to stay at low levels," said Cemal Demirtas, head of research at Istanbul-based Ata Invest.

He also cited December's below-expectations industrial production data as a factor prompting investors to sell.

(Writing by Seltem Iyigun; Editing by Catherine Evans)

((seltem.iyigun@thomsonreuters.com)(+90 212 350 70 62)(Reuters Messaging: seltem.iyigun.thomsonreuters.com@reuters.net))

Keywords: MARKETS TURKEY/