Turkey's lira flat ahead of Turkish-U.S. meeting as banks squeeze offshore swap markets

ANKARA, Oct 17 (Reuters) - Turkey's lira was flat on Thursday, as banks squeezed offshore swap markets to support the currency before an expected meeting between U.S. and Turkish officials over Ankara's military incursion into Syria.

The lira has been pressured for months by concerns over deteriorating ties between Ankara and Washington, mainly over Turkey's purchase of Russian S-400 missile defence systems and more recently over its operation against the Kurdish YPG militia in northern Syria.

The currency has thus far shrugged off Washington's response to the operation, which has included sanctions on three Turkish ministers and two ministries, a tariff hike and a suspension of trade talks.

U.S. Vice President Mike Pence and Secretary of State Mike Pompeo were due to arrive in Turkey on Thursday to urge Ankara to declare a ceasefire.

Ahead of the talks, the lira traded at 5.8970 against the dollar at 0708 GMT, slightly weaker than Wednesday's close of 5.8885.

Turkish state banks have stepped in to support the currency, selling dollars since the Syria incursion began last week. Three bankers said banks also continued to squeeze an offshore FX swap market on Thursday to defend the lira.

"The tendency of Turkish banks to provide lira to the swap market is nearly down to zero, except the pre-determined responsibilities and outstanding amounts," said a senior banker, who declined to be named.

Banks had also squeezed swap markets in March, briefly sending the cost of overnight lira borrowing soaring past 1,000%. It stood at 16.6% at 0730 GMT, from a close of 17.3% on Wednesday.

State banks also stepped in to sell dollars in March when the lira briefly tumbled, and traders have said they intervened again in the last two weeks.

Turkey's incursion into northeast Syria has further tested its ties with the United States and could imperil its economy's recovery from recession, which was sparked by a crisis that chopped nearly 30% off the value of the lira last year. The currency is down another 10% this year.

U.S. prosecutors on Tuesday charged Turkish state-owned lender Halkbank with taking part in a multibillion-dollar scheme to evade U.S. sanctions on Iran. (Reporting by Nevzat Devranoglu; Writing by Ali Kucukgocmen)