Turkish state-run Ziraat Bank scrapped talks to acquire Bank Asya on Thursday, deepening concerns over the Islamic lender's future and making it more likely it will be seized by the state.

Bank Asya's profits and capital base have collapsed since December, when it found itself at the centre of a power struggle between Prime Minister Tayyip Erdogan and Fethullah Gulen, an Islamic cleric whose sympathisers founded the bank.

With Erdogan's victory in the presidential election earlier this month, the dispute between him and Gulen took a further twist, with Erdogan repeatedly saying the campaign against Gulen's Hizmet movement would intensify.

The government cancelled tax collection and social security contracts with Bank Asya earlier this month, seen by observers as a move to wind down the lender. However Bank Asya said those actions would not have a significant impact on its activities.

Ziraat, which made the announcement in a statement to the Istanbul stock exchange, had been in unofficial talks with Bank Asya as it worked to establish its own participation bank, as Islamic lenders are known in Turkey.

"It was decided that launching an official process on buying Bank Asya's preferred stock would not be in line with our bank's priorities at this stage, and the decision was made to end the talks as of today," the Ziraat statement said.

Bank Asya said its activities were continuing as usual and denied any uncertainty regarding its management or ownership structure. The bank also said it understood that an official offer for its stake would not be made.

Bank Asya shares have been suspended in Istanbul due to uncertainty about its future and were temporarily removed from the exchange last week in a fresh blow to the bank.

SEIZURE CLOSER?

Ziraat's announcement may increase the likelihood of Bank Asya being seized by the state, after this month's cancellation of the tax collection and social security payment deals.

"With this news it seems like we are one step closer to (seizure). You are cutting away all the branches they can hold onto. You are not letting them collect taxes," said a banking analyst who did not want to be named.

"When you add all this together, we are seeing continuing (government) efforts to get the upper hand (against the Gulen movement)."

Bank Asya is one of four Islamic lenders in Turkey.

Three state-run Turkish banks - Ziraat, Vakifbank and Halkbank - have been looking into setting up Islamic banks over the past year as the secular republic has opened up to Islamic finance to tap a pool of rich investors.

With its economy regarded as one of the most progressive and successful in the Muslim world, Turkey is seeking a bigger role in Islamic finance.

This month, top government officials appeared to be at odds over a possible state purchase of Bank Asya. Deputy Prime Minister Ali Babacan said that Ziraat could buy it, but an adviser to Erdogan subsequently denied such a plan.

Bank Asya attempted earlier this year to form a strategic partnership with Qatar Islamic Bank (QIB) but the deal never materialised, opening the way for alternative suitors. - Reuters