By Daren Butler

ISTANBUL, Aug 2 (Reuters) - Turks will go to the polls twice
in the next 12 months to cast votes which will shape the course
of reform in a country enjoying a solid economic recovery but
still grappling with intractable domestic problems.

A Sept. 12 referendum on government-backed constitutional
reforms will provide clues to prospects for the parliamentary
election due by July 2011.

Meanwhile, Prime Minister Tayyip Erdogan faces the challenge
of dealing with an upsurge in Kurdish guerrilla violence and
tensions generated by court investigations of alleged
military-backed plots to overthrow his government.

Following are some of the key risks to watch.


Campaigning is heating up for the referendum. The government
was helped by a Constitutional Court decision to reject an
opposition appeal against the reforms.

Erdogan says his 26-article package will make Turkey more
democratic and bring it more into line with countries in the
European Union, which it is bidding to join.

The opposition presents the plebiscite as a confidence vote
for the AK Party, which could lose its dominance ahead of the
general election due by next July. One opinion poll suggests a
close result in the referendum, which would unsettle investors.

The reforms include changes in the ways senior judges are
selected and measures to allow military personnel to be tried in
civilian courts.

The opposition says the changes aim to cement the AK Party's
grip on power and to install judges sympathetic to the party.

It has sought to snatch the reform initiative from Erdogan
by proposing an amendment to a 75-year-old law that enshrines
the military's role as guardian of the state and has been used
to justify coups.

A "yes" vote in the referendum will give the government a
powerful boost ahead of the general election, while a "no" vote
would put reforms in doubt, fuel political uncertainty and
unsettle markets.

For all the political churn, Turkey's markets have brimmed
with confidence. The Istanbul share market's benchmark index has
hit record highs and bond yields traded at nine-month lows in
late July. The lira currency has not weakened as much against
the dollar as currencies of major trade partners, which could
hamper exports.
What to watch:

-- The referendum result will shape the political climate
for next year's election and set the tone for investors.

-- An overwhelming victory could tempt Erdogan into an early
election, but defeat won't necessarily precipitate a snap poll.


Speculation on the timing of parliamentary polls continues,
despite Erdogan saying that he won't call a snap election.

The main opposition Republican People's Party (CHP) has been
revitalised by the election of new leader Kemal Kilicdaroglu in
May. Recent opinion polls show support for the AK Party fading.

One recent opinion poll has even shown the CHP edging ahead
in popularity. While there is scepticism about the survey's
findings, it raised doubts about whether the AK Party could hold
onto the single-party rule it has enjoyed since 2002.

The AK Party can wait to reap the full benefits of a strong
recovery from last year's sharp economic contraction, with hopes
that expected growth of over 6 percent this year will bring
unemployment down to 10 percent.

What to watch:

-- Erdogan's comments on reforms and timing of the

-- Opinion polls: what are the chances of AK forming a
single-party government for a third term? Any doubts would
disappoint investors.


Long-running strains between the government and secularist
military were aggravated by a court demand for the arrest of
more than 100 people, including retired commanders and serving
officers, over a plot to oust Erdogan in 2003.

According to Turkish media, the "Sledgehammer" plot was said
to involve bombing historic mosques and provoking Greece into
shooting down a Turkish warplane to destabilise the government.

While the Turkish public and markets have grown accustomed
to such shocking reports, the investigations still have the
potential to undermine investor confidence given the seniority
of these commanders, the scale of the alleged conspiracy, and
Turkey's past, if increasingly distant, history of coups.

Concerns that the AK Party was seeking to undermine Turkey's
secular system have been at the root of past tensions, but that
issue has for now receded. The AK Party sees itself as a Muslim
version of Europe's conservative Christian Democrat parties,
whereas critics suspect it harbours a hidden Islamist agenda.

The Supreme Military Council, which decides on officers'
promotion and expulsions, is meeting this week and its decisions
will be watched for any reaction to the Sledgehammer case.

The Council is expected to appoint land forces commander
Isik Kosaner as the new Chief of General Staff after General
Ilker Basbug's term of duty ends in August. Any comments by
Kosaner on the investigations and Kurdish insurgency will be

What to watch:

-- The outcome of the Supreme Military Council may give
indications of the prevailing attitude in the armed forces to
the pressures brought by the Sledgehammer case.

-- Comments from the new armed forces chief.


The Kurdistan Workers Party (PKK) guerrilla group ended a
unilateral ceasefire at the end of May, resulting in a surge of
violence in the long-running insurgency that has undermined the
government's initiative to boost Kurdish rights.

There is speculation that the army could launch a ground
offensive against rebel bases in northern Iraq.

Tensions between Turkish and Kurdish communities have
resurfaced, with street battles in July in both the south and

What to watch:

-- Increased violence is likely to fuel nationalist
sentiment which could hinder the government as it campaigns for
the referendum.

-- Any major incursion into northern Iraq would add to


Turkey remains keen to defuse tensions between Iran and
world powers over Tehran's nuclear programme. Istanbul is
expected to host talks in September between Iran and European
Union foreign affairs chief Catherine Ashton, who represents the
world powers in the talks.

Turkey has increased economic links with eastern neighbours
and faces difficulty balancing interests if relations between
Tehran and the West deteriorate further.

Ties remain fraught with former close ally Israel, after a
deadly Israeli raid on a Turkish-backed aid flotilla for Gaza on
May 31. Turkey says it remains committed to allies in the West,
despite warm relations with neighbours Iran and Syria.

Turkey's EU membership bid is hobbled by an impasse over the
divided island of Cyprus, but investors do not appear alarmed as
long as the government proceeds with EU-inspired reforms.

What to watch:

-- Any event that could add to concerns that Turkey's
foreign policy is shifting away from the West.

-- Can the impasse over Cyprus be broken, to help Turkey's
EU membership bid?

(Reporting by Daren Butler and Simon Cameron-Moore; editing
by Mark Trevelyan)