UPDATE 1-Turkish markets firm, eyes on another rate cut

(Adds closing prices, inflation data, quotes)

ISTANBUL, Feb 4 (Reuters) - Turkish markets gained on Monday, as improved global sentiment overshadowed domestic politics, while investors welcomed inflation data released after the market closed saying it supported another interest rate cut.

The main share index .XU100 rose 2.85 percent to 45,719.91 points, building on a 4 percent rally on Friday, but still down 18 percent from the end of last year.

The lira <IYIX=> firmed to 1.1620 against the dollar from Friday's close of 1.1640, while the yield on the benchmark Oct. 7, 2009 bond <TRTSYSUM=IS> was unchanged on the day at 16.39 percent.

Sentiment was boosted by gains in Asian and European stocks after Microsoft's (MSFT.O: Quote, Profile, Research) $45 billion bid for Yahoo (YHOO.O: Quote, Profile, Research).

"As long as sentiment, especially in Asia, continues to be positive, we could see more buying. Turkey is focused on the global scene, which could be positive because we have some political tension at home," said Ayse Colak, analyst at Tera Stockbrokers.

After the market closed, the Turkish Statistics Institute said consumer prices rose a lower-than-expected 0.80 percent in January for an annual rate of 8.17 percent, and analysts said the numbers supported a sixth consecutive rate cut at the Central Bank's Feb. 14 meeting.

"As long as we don't hear any more bad news from banks abroad, investors will be trading with an eye to a 25 basis point rate cut in February. But people are afraid of more bad news flow," Colak said.

Investors took in their stride political tensions over a government plan to lift a ban on female students wearing headscarves at university, a move fiercely opposed by Turkey's secularist elite.

The plan sparked a protest at the weekend in Ankara but the AK Party-dominated parliament is expected to approve the reform in votes scheduled for Wednesday and Saturday. (Reporting by Thomas Grove)