Turkish shares and currency regained some of their losses in trading Tuesday after falling more than 7 percent the previous day over investor shock by an attempt of the country's top prosecutor to ban the Islamist-rooted ruling party for undermining the nation's secular system.

The national index gained 522 points, or 1.32 percent, in morning trading Tuesday, reaching 39.931 points, after losing 7.46 percent on Monday.

Turkey's chief prosecutor filed an indictment at the Constitutional Court last Friday, calling for the Justice and Development Party (AKP) of Turkish Prime Minister Recep Tayyip Erdogan to be outlawed for anti-secular activities.

Prosecutor Abdurrahman Yalcinkaya argued that the AKP, which was re-elected for a second five-year term in July, is turning its religious rhetoric into action in a bid to replace Turkey's secular system with an "Islamist-inspired" government.

He also called for 71 people, among them Erdogan and President Abdullah Gul, to be barred from politics.

The legal onslaught stoked fears among investors, already alarmed by a global stock market rout sparked by the collapse Friday of U.S. investment bank Bear Stearns and a flight from the dollar into the euro and commodities, such as gold and oil, which investors think will be safer.

Although the Turkish lira recovered some ground against the dollar Tuesday, trading at 1.248, compared to 1.275 on Monday, the interest rate or yield on the benchmark October 7, 2009 bond didn't fare so well. It fell Tuesday to 18.31 percent from 18.35 percent on Monday.

Erdogan tried to calm jitters by ruling out speculated snap general elections.

"The elections will be held in their normal time," Erdogan said at a joint press conference Monday with visiting Estonian counterpart Andrus Ansip. He added: "There is stability and confidence in the country at present and we will not allow it to be disrupted…. We keep moving forward with confident steps."

The prosecutor's move is the latest round in the AKP's bitter battle with Turkey's secular forces – among them the army, the judiciary and academia – which has raged since the party first came to power in 2002.

The AKP, an offshoot of a now-banned Islamist party, has disowned its roots and pledged commitment to secularism. But, secularists are wary over its background and accuse the party of having a secret plan to introduce religious rule in the mainly Muslim country.

Tensions flared last month when the AKP, bolstered by a strong parliamentary majority following its re-election in July, pushed through parliament a controversial bill to allow women to wear the Islamic headscarf in universities.

A leading Turkish economist said that the Istanbul stock market jitters clearly reflect the renewed political instability.

"The initial fall is linked to the bid to ban the AKP because the government will be forced use its political energy to deal with the case, thus slowing down reforms linked to the European Union and the International Monetary Fund, as well as privatization efforts," said Ozgur Altug, chief economist at Raymond James.

He noted that Turkish markets were influenced more by global trends rather than domestic matters, but said that "the court case limits investor expectations of a recovery in the mid-term." Investors, he said, are also concerned over possible political instability in Turkey if the constitutional court bans the AKP, although the risk had not been priced in yet.

"If there is no political stability, there is no investment. What investors fear is that the stability that Turkey has been gradually achieving despite difficult conditions abroad is now in danger," he added.

The AKP, which first came to power in 2002 as an untested party, won kudos from the business community in its first-term in power as it consolidated the country's recovery from a severe recession, attracted record foreign investment, and launched membership talks with the European Union.

The court will decide within several days whether to accept the indictment, while a verdict is expected to take up to six months.