As the cost of insuring Turkish debt against default over five years surged more than 100 basis points to 537 basis points, the Treasury announced it wouldn't sell 10-year fixed-coupon debt Tuesday as scheduled and will offer only floating-rates notes.
Turkey's worsening currency crisis sent world equities lower and cut into the value of emerging market stocks and currencies on Monday, while boosting the prices of German bonds and other stable assets.
Turkey on Monday announced it would take legal action against hundreds of social media accounts it said was "creating a negative perception" of the economy amid the ongoing plummet of the lira.
US President Donald Trump has demanded that Turkey release a US pastor being held on charges of aiding terrorists. "There is no economic reason for the present (currency plunge) situation".
But Erdogan advised Turks not to worry.
"I am specifically addressing our manufacturers: Do not rush to the banks to buy dollars", he said.
Businesses should "know that keeping this nation alive and standing isn't just our job, but also the job of industrialists, of merchants".
"The plunge in the lira, which began in May, now looks certain to push the Turkish economy into recession, and it may well trigger a banking crisis", said Andrew Kenningham, chief global economist at Capital Economics.
Trouble in Turkey could make investors reassess their holdings in other emerging markets. Meanwhile, inflation has hit 15 percent.
But now with every one percent the lira loses, the dollar debt automatically rises- as shown in a graph - meaning the first Turkish companies can no longer meet their financial obligations and have had to restructure their loans. Our relations with Turkey are not good at this time!' The EU put new taxes on United States motorcycles in response to the Trump administration's tariffs on products imported from Europe.
The dispute centres on Turkey's refusal to release U.S. pastor Andrew Brunson.
Mr Brunson has been detained for almost two years, accused him of links to the outlawed Kurdistan Workers Party and the Gulenist movement, which Turkey blames for a failed coup in 2016.
What are Turkish officials doing about the lira?
Finance Minister Berat Albayrak said in an interview with Turkish newspaper Hurriyet on Sunday that the government has drafted an economic action plan that it will start implementing on Monday morning.
Erdogan's comments on interest rates - and his recent appointment of his son-in-law as finance minister - have heightened perceptions that the central bank is not independent.
But the bank did not increase interest rates, which would help contain inflation while supporting the lira.
"This extends well beyond the row with the US, as Erdogan has arrested tens of thousands of "Gulenists" involved not only in the economy but all aspects of society".
Commerzbank said that the crisis in Turkey is "home-grown" and the result of "serious errors on the part of the political leadership", which means that "there is actually little threat of other countries being dragged down as well".
Why is there so much fear of contagion?Elsewhere, markets were seeing losses of about 0.5% to 0.8% as investors digested last week's 25% fall in the lira.
Spain's BBVA, Italy's UniCredit, France's BNP Paribas, Dutch bank ING and Britain's HSBC are the most exposed to Turkey and vulnerable to its free-falling currency.
Tom Kinmonth, senior fixed income strategist at ABN Amro Bank, has calculated that European bank exposure is limited in Turkey.
The Post Office said sales of lira in the past week were three times higher than a year ago.