UPDATE 1-Turkish economy shrinks 2.6% in Q1 as recession bites

(Adds breakdown of GDP data, latest economic signals, context)

By Behiye Selin Taner and Daren Butler

ISTANBUL, May 31 (Reuters) - The Turkish economy contracted 2.6% year-on-year in the first quarter, in line with expectations, as the official data reinforced the country's slide into recession after last year's currency crisis.

The major emerging market economy, which has a track record of more than 5% growth, has been rocked by a 36% tumble in the lira's value against the dollar since the end of 2017. Inflation shot up last year and the central bank hiked rates to slow economic activity.

A Reuters poll forecast an annual shrinkage of 2.5% in the latest quarter.

Compared to the previous quarter, first quarter GDP expanded a seasonally and calendar-adjusted 1.3%, the Turkish Statistical Institute data showed.

The data also confirmed that the Middle East's largest economy contracted 3% year-on-year in the fourth quarter, its worst in nearly a decade, capping a year in which it logged 2.6% overall growth.

Weakness in the construction and industrial sectors dragged badly on the economy in the first quarter, while agriculture expanded.

Last year's currency crisis, brought on by concerns over a diplomatic row with Washington and the independence of the central bank, ended years of a construction-fueled boom driven by cheap foreign capital.

The lira has come under renewed pressure in recent months as investors fretted about the threat of new U.S. sanctions, uncertainty over local election results, declining central bank reserves and a trend of Turks ramping up foreign holdings.

Initial data for the second quarter has shown continued poor sentiment regarding the economic outlook.

The Purchasing Managers' Index (PMI) for manufacturing fell to 46.8 in April from 47.2 in March, while consumer confidence tumbled to 55.3 points in May, its lowest level since the data was first published in 2004.

Official data on Friday showed the foreign trade deficit narrowed 55.6 percent year-on-year in April to $2.982 billion, with exports rising 4.6% while imports slid 15.1%. (Reporting by Behiye Selin Taner; Writing by Daren Butler; Editing by Jonathan Spicer)