UPDATE 1-Turkish shares at 14-month high, bank earnings optimism helps

* Shares hit 14-month high as banks' Q2 results eyed

* Lira recovers from last week's losses, bonds flat

* Hopes of ECB, Fed action boost sentiment (Adds closing prices, fresh quotes)

ISTANBUL, July 30 (Reuters) - Turkish shares hit their highest level in over a year on Monday as investors looked with optimism to earnings from the banking sector, and the lira firmed to a 10-day high against the dollar, recovering from recent dollar purchases by local companies.

Bond yields were steady after falling around 10 basis points after the central bank cut its year-end inflation forecast last Thursday to 6.2 percent, from 6.5 percent.

Istanbul's main share index closed 1 percent higher at 65,032 points, its highest since May 18, 2011 and outperforming a 0.6 percent rise in the MSCI emerging markets index.

Bank shares led the rally with the banking sector index closing up 1.1 percent.

"The positive sentiment over banking results, following Halkbank's better-than-expected profit last week, continues. 65,200-65,500 are important levels," said Timucin Alp, vice manager of research at Tekstil Securities.

State-run lender Halkbank posted a 38.5 percent jump in second-quarter net profit last week.

"Tomorrow Garanti Bank will release its financial results. This would affect the trend over shares," Alp said.

Indications from Turkey's central bank last week that it might gently ease monetary policy to support the economy supported shares. Rising global risk appetite spurred by hopes for further action from the European Central Bank to tackle the euro zone debt crisis and for stimulus from the U.S. Federal Reserve also underpinned Turkish assets.

Turkish lenders Garanti, Akbank and Yapi Kredi are expected to release second-quarter earnings between July 31 and Aug. 3.

Banking shares were not affected by data on Monday from Turkey's banking watchdog, showing annual loan growth fell to 17.4 percent as of July 20, from 18.4 percent a week earlier.

By 1503 GMT, the lira traded at its strongest since July 20 at 1.8020 versus the dollar, strengthening from 1.8116 late on Friday. Against its euro-dollar basket , the lira firmed to 2.0041, from 2.0262 on Friday.

"The lira is making up for last week's losses that were mainly due to local energy companies' typical dollar buying towards the end of each month to pay their import bills," said Tufan Comert, strategist at Garanti Securities.

The lira fell to as low as 1.8310 on Thursday after central bank Governor Erdem Basci indicated the bank might ease monetary policy. But the market has since become more cautious as inflation still stands at 8.87 percent, far above the bank's year-end target of 5 percent.

Turkey's benchmark March 2014 bond yield closed at 7.77 percent, little changed from a previous close of 7.78 percent. (Writing by Seltem Iyigun; Editing by John Stonestreet and Susan Fenton)