(Reuters) - Turkish Prime Minister Tayyip Erdogan accused political enemies of shameless fabrication of a telephone tap of him telling his son to dispose of large sums of money on the day police raided houses in a graft inquiry into his government.
In a dramatic session of parliament after posting of the 11-minute audio tape on YouTube, Erdogan said his political enemies had penetrated encrypted state communications. He did not name the opponents but made it clear he was talking of a network run by former ally, Islamic cleric Fethullah Gulen.
Supporters of Erdogan, locked in a power struggle with Gulen whom he accuses of contriving a graft scandal to topple him, shouted "Tayyip, we came here to die with you", "stand tall, don't bow" and "time is on our side".
"The people don't believe these lies," Erdogan called back to loud cheers and applause from the public gallery.
Growing political uncertainty around the government and its reaction to the tapes, which Reuters could not authenticate, hit Turkish assets amid broader weakness in emerging markets.
Gulen, through his lawyer, has described the accusation of complicity as unjust and contributing to an atmosphere of "hatred and enmity" in Turkish society.
Opinion polls taken before Monday's posting show Erdogan's popularity little affected by the corruption scandal which broke on December 17 with the detention of businessmen close to him and three ministers' sons. Monday's tape will prove a further test of that resilience ahead of March local elections.
Erdogan took over a country in 2002 mired in political factionalism and economic crisis. Presenting the welcome face of a strong leader, he united a wide spectrum of forces, fired the economy, drove economic reform and tamed generals who had toppled four governments in the latter 20th century.
The formal opposition remains weak and lacking leadership, the challenge coming however from Hizmet.
"They went and made a shameless montage and released it," Erdogan told parliament. "They are even listening to the state's encrypted telephones. That's how low they are."
"There is no allegation that we cannot answer."
The "they" cited by Erdogan was a clear reference to those among the followers of U.S.-based Islamic cleric Gulen he accuses of building a "parallel state" using influence in the judiciary and police. Gulen denies the accusation.
"We will reveal one-by-one all the disgraces of the parallel organization and we will make those who walk with them so embarrassed they won't be able to go out into the street," Erdogan told parliament.
The recording is purportedly of Erdogan and his son Bilal discussing how to reduce the funds to "zero" by distributing them among several businessmen. At one point, the voice supposedly of Bilal says some 30 million euros ($40 million) remain to be disposed of.
Government officials said previous such recordings may have been of ministers and businessmen's voices but that the conversations were put together from comments taken out of context to give the impression of impropriety.
"They have wiretapped the Prime Minister, they have wiretapped the chief of intelligence, Ministers, many others. They wiretap the phone for 18 months, they listen to you, and then out of the 18 months of wiretapping they take two or three sentences," said one senior official.
"Can you imagine the stories you can write out of those two or three sentences, with no context, no background?"
Gulen's Hizmet (Service) organization, which runs a wide network of schools, businesses and media groups, exercises strong influence in the police and judiciary. The cleric denies government accusations it drew on this network to undermine Erdogan after a political falling out between the two men.
Erdogan remains far and away Turkey's most popular politician. But the apparent power struggle with Gulen and his purges of the police and judiciary have cast a shadow over what Western powers long vaunted as a prime example of an effective Islamic democracy.
Faruk Logoglu, former ambassador to Washington and vice chairman of the main opposition CHP, said he believed there was no question about the authenticity of the tape, which his party replayed to its deputies at a parliamentary group meeting.
Most TV channels, largely under government control, halted coverage of the meeting when the recording was played. They resumed coverage afterwards and did not cut away when the CHP leader continued talking about the recording.
"Saying it is fake doesn't mean it didn't take place," Logoglu said. "What else can he say?.. In a minimally functioning democracy the first thing the prime minister has to do is resign.
"He is clinging on to power and that's the problem. This is probably the tip of the iceberg."
Riot police fired tear gas and water cannon to disperse several hundred people, mainly students, at a gathering called to protest against construction of a highway, but which turned into an anti- government demonstration. "Government resign" and "Thief Tayyip Erdogan", the crowd chanted.
"MOB OF LOSERS"
The recordings surfaced two days after Erdogan's AK Party began campaigning for March local elections that will be followed later in the year by presidential polls that could decide Erdogan's political future after 11 years in power.
The government responded to the graft inquiry by dismissing or reassigning thousands of police officers, tightening its control over the appointment of judges and prosecutors, and pushing through a new law that allows the authorities to block access to websites within hours without a prior court order.
Erdogan, as in the past, suggested a broader conspiracy against Turkey including The "interest rate lobby" of financiers and "the terror lobby".
"The lobby of those who couldn't win the people's support, the mob of losers came together once more on December 17. Now they are saying 'we are going to rule Turkey'."
The growing political uncertainty hit financial markets.
The lira hit two-week lows against the dollar while stocks fell three percent.
Timothy Ash, head of emerging markets research at Standard Bank, said Erdogan was likely to go further on the offensive against those he deems responsible for producing these tapes.
"This seems to be a battle to the end..The Gulenists seem to want to wound Erdogan below the waterline to undermine the AK Party's poll performance in March," Ash wrote in a note.
Social media and video-sharing sites have been awash with leaked recordings presented as evidence of wrongdoing. As with the latest recordings, Reuters has been unable to verify their authenticity.