ISTANBUL (Reuters) - Turkish riot police moved on Tuesday into the central Istanbul square at the heart of 10 days of anti-government protests, firing tear gas and water cannon at hundreds of protesters armed with rocks and fireworks.
Prime Minister Tayyip Erdogan declared he would not yield to the protesters. In a further sign of the effect the crisis has had on financial markets, the central bank said it would intervene if needed to support the lira.
"They say the prime minister is rough. So what was going to happen here? Were we going to kneel down in front of these (people)?" Erdogan said after the action began.
"If you call this roughness, I'm sorry, but this Tayyip Erdogan won't change."
Police backed by armoured vehicles moved soon after dawn into Taksim Square, site of the initial protest against government construction plans 10 days ago which sparked the worst unrest in decades.
Bulldozers cleared barricades, but by early evening hundreds of protesters remained on one side and black smoke from bonfires of rubbish and plastic mingled with tear gas. Demonstrators skirmished with police.
Tear gas drifted into the lobby of an upmarket hotel, overwhelming some guests who were moved to the basement.
What began as a protest at redevelopment plans for Gezi Park, a leafy corner of the square, has grown into an unprecedented challenge to Erdogan.
Victor in three consecutive elections, he says the protests are engineered by vandals, terrorist elements and unnamed foreign forces. His critics say his unyielding talk has made the crisis worse.
"A comprehensive attack against Turkey has been carried out," Erdogan told a parliamentary group meeting of the AK Party he founded in 2001 and led to power in 2002.
"The increase in interest rates, the fall in the stock markets, the deterioration in the investment environment, the intimidation of investors - the efforts to distort Turkey's image have been put in place as a systematic project," he said.
Thousands packed into Gezi Park, now a ramshackle settlement of tents at the edge of the square; among their number leftists, environmentalists, liberals, students and professionals who see the development plan as symptomatic of overbearing government.
Despite the street protests against Erdogan, he remains unrivalled as a leader in his AK party, in parliament and on the streets. Many protesters call for his resignation, but others say they just want to moderate his exercise of power.
One organising group called for a mass protest on the square, where stalemate seemed to prevail. Police were expected to block any attempt to move into the area in the night.
The unrest has knocked investor confidence in a country that has boomed under Erdogan. The lira currency, already suffering from wider market turmoil, fell to its weakest level against its dollar/euro basket since October 2011.
The cost of insuring Turkish debt against default rose to its highest in ten months, although it remained far from crisis levels.
Western allies have expressed concern about the troubles in a key NATO ally bordering Syria, Iraq and Iran. Washington has held up Erdogan's Turkey as an example of an Islamic democracy that could be emulated elsewhere in the Middle East.
The police move came a day after Erdogan agreed to meet protest leaders, whose peaceful demonstration two weeks ago spiralled into anti-government protests in cities across the country after police crushed it using tear gas and water cannon.
"I invite all demonstrators, all protesters, to see the big picture and the game that is being played," Erdogan said. "The ones who are sincere should withdraw ... and I expect this from them as their prime minister."
Police removed huge banners hung by protesters from a building overlooking Taksim but the local governor said they had no intention of breaking up a protest on Gezi Park itself. Riot police moved into the park briefly, then withdrew.
Hundreds of protesters, many wearing facemasks and hard hats, gathered on steps leading from the square to the park.
"Our aim is to remove the signs and pictures on the Ataturk statue and the Ataturk Cultural Centre. We have no other aim," Istanbul Governor Huseyin Avni Mutlu wrote on Twitter.
Police hung a single Turkish flag and picture of the founder of the Turkish secular state, Mustafa Kemal Ataturk, from the building. Protesters accuse Erdogan of authoritarian rule and some suspect him of ambitions to replace the secular republic with an Islamic order - something Erdogan denies.
"This movement won't end here. We've started something much bigger than this park ... After this, I don't think people will go back to being afraid of this government or any government," said student Seyyit Cikmen, 19, as the crowd chanted "Every place is Taksim, every place resistance."
Police appealed to the protesters not to throw rocks, calling from loudspeakers, "Dear Gezi friends. We are unhappy with this situation. We don't want to intervene. We don't want to harm you. Please withdraw."
Turkey's Medical Association said that as of late Monday, 4,947 people had sought treatment in hospitals and voluntary infirmaries for injuries, ranging from cuts and burns to breathing difficulties from tear gas inhalation, since the unrest began more than ten days ago. Three people have died.
Erdogan has repeatedly dismissed the protesters as "riff-raff". But Deputy Prime Minister Bulent Arinc said on Monday leaders of the Gezi Park Platform group had asked to meet him and Erdogan had agreed.
A meeting was expected on Wednesday.
Erdogan has made many democratic reforms, taming a military that toppled four governments in four decades, starting entry talks with the European Union, reining in rights abuses by police and forging peace talks with Kurdish rebels to end a three-decades-old war that has cost 40,000 lives.
His AK Party has taken Turkey from a crisis-prone economy to Europe's fastest growing over the past decade, and has won three successive elections, each time with a higher share of the vote.
But the protests, embracing a wide range of people from nationalists and leftists to secular activists and students, have shaken Turkey's reputation for stability.
(Additional reporting by Daren Butler, Ece Toksabay and Humeyra Pamuk; Writing by Nick Tattersall; Editing by Janet McBride, Giles Elgood and Peter Graff)