Turkey's banking watchdog the Banking Regulation and Supervision Agency (BDDK) decreased on Tuesday the daily limit in foreign currency swap transactions from 50 percent of banks' equity capital to 25 percent in a bid to stabilize the lira.

"The total notional principle amount of banks' currency swaps and other similar transactions (spot + forward FX) with foreign counter parties where at the initial date of the transaction local banks pay TRY and receive FX should not exceed 25 percent of the bank's regulatory capital," the BDDK said in a statement.

"In this regard, unless current excess is eliminated, no further transactions of these types could be executed and maturing transaction should not be renewed. The above mentioned ratio should be calculated daily on a consolidated and individual basis," the statement added.

On Tuesday, the U.S. dollar briefly retreated below 6 per Turkish lira with daily losses exceeding 5 percent.

Washington and Ankara have been involved in a bitter diplomatic spat in recent weeks over the arrest of American pastor Andrew Brunson, who faces charges over links to the PKK and Gülenist Terror Group (FETÖ).

President Donald Trump imposed sanctions doubling tariffs on Turkish aluminum and steel products on Aug. 10, whereas the Turkish justice and interior ministers were also sanctioned over their alleged role in Brunson's arrest.

Turkish officials described the U.S. moves and their effects on the lira as an economic war, and retaliated in kind to U.S. sanctions.