(Adds more sackings, minister's quote)
By Ayla Jean Yackley and Ece Toksabay
ISTANBUL, Dec 20 (Reuters) - Prime Minister Tayyip Erdogan's purge of the police command spread to other state institutions on Friday, widening a crackdown on what he described as a foreign-backed conspiracy to undermine him and create a "state within a state".
The crisis, Erdogan's biggest challenge in 11 years as Turkey's leader, raised fears of damage to the Turkish economy and a fracturing in his AK Party, helping drive the lira to a historic low.
Erdogan ordered at least 14 senior police officers removed on Friday after the police launched a series of anti-corruption raids and detained senior businessmen close to Erdogan as well as the sons of three cabinet ministers.
The powerful Istanbul chief was sacked on Thursday following the dismissal of dozens of unit chiefs.
The vice chairman of the financial crimes investigation board, a unit of the finance ministry, was also removed on Friday, local media reported, as well as the editor-in-chief and news channel coordinator of state-owned TV channel TRT.
Erdogan has refrained from naming U.S.-based Islamic cleric Fethullah Gulen, a man with strong influence in the police and judiciary, as the hand behind the raids which shook the political elite. But Gulen's Hizmet (or Service) movement has been increasingly at odds with Erdogan in recent months.
"This is not one of those crises from which Erdogan can come out stronger," said Henri Barkey, a Turkey specialist at Lehigh University's department of international relations. "The public will ask if this is the result of an evil probe (or) foreign plot, then why are all of these police chiefs sacked?
Erdogan, who has called the raids and detentions a "dirty operation" to tarnish the government, is under strong pressure to resolve the crisis before it hits the Turkish economy hard.
"The problem is this is not happening at a time when the economy is given enough of a buffer to withstand political turbulence. The fear is that the authorities start to loosen fiscal policy," said Manik Narain, emerging markets strategist at UBS in London.
EU Minister Egemen Bagis made a statement on Friday denying any wrongdoing, and joined the Prime Minister in calling the operation a conspiracy against the government.
"These scenarios, that are created on purpose, are completely false and products of imagination, and are part of a base conspiracy," he said in a written statement.
The central bank said it could sell as much as 10 times the amount previously announced at its forex auctions and analysts said chances were it might follow that threat with direct intervention in markets next week.
Later on Friday, the central bank sold $400 million in a forex auction, eight times the size it had announced earlier, a move which failed to prevent the lira from trading at all-time lows.
"The big picture is Turkey doesn't have enough reserves to spend on defending the currency," said Narain.
Erdogan's reference on Wednesday to attempts to form a "state within a state" would have a strong resonance for Turks long accustomed to view the military in the same vein.
Erdogan moved quickly after his election in 2002 to banish from politics a military that had carried out a string of coups in the second half of the 20th century, including the 1997 removal of an Islamist-government he backed. Hundreds of senior officers were jailed.
Gulen has no direct electoral influence in Turkey, something alluded to by Erdogan when he challenged his unnamed rivals to put their popularity to the test at local elections due next spring.
But through a network of well-funded private schools, media ventures and other social organisations, Gulen has built a network of followers across the Turkish establishment, reaching into Erdogan's AK Party. The loyalties are not always openly declared and the exercise of influence is often unseen.
At the root of the conflict between Hizmet and Erdogan was a government plan to close down the private schools, a major source of income and influence for the movement. But there have been other points of conflict between the former allies.
There has been no official comment on the findings in the raids. Newspaper reports have referred to large quantities of cash. If the accusations proved true, the scandal could certainly damage Erdogan, who swept to power in 2002 on public anger over corruption, but he is resilient.
Erdogan holds in reserve the option of bringing forward parliamentary elections not due until 2015, drawing on his continuing popularity, apparently undented by unprecedented summer protests. But such a move appears still far off.
"We don't see the necessity of an early election because of the operations and its impact so far," a senior AK Party official said.
Erdogan will hope to ease tensions with a cabinet reshuffle expected over the weekend and with the breaking of the corruption scandal expected to take on a greater scale. On Friday evening he attends a dinner with his party's lawmakers.
"The cabinet reshuffle will provide the needed dynamism. At tonight's dinner the message ... will be this: We're going through a difficult period. We should stay together and refrain from any behaviour that could lead to damage to the party," the party source said.
One possible move by Erdogan would be to appoint Hakan Fidan, head of the security service MIT and a close ally of the Prime Minister, as interior minister.
Erdogan has cited an internal conspiracy by "gangs" aided by outside forces - comments that in his eyes might encompass Hizmet. But he has alluded to wider involvement.
Summer riots and protests against what opponents call an increasingly authoritarian style of government drew accusations from Erdogan of outside interference by foreign financial and media organisations. The concept of conspiracy can carry great weight in Turkey, within and beyond government.
The rights and wrongs of the corruption accusations may be lost in the political fray that appears to underlie it.
"Rather than a ... pernicious act, it may be that members of the police and bureaucracy were waiting for a chink in the government's armour and saw an opportunity to go after those guilty of corruption," said Andrew Finkel, author of the book "Turkey: What Everyone Needs to Know."
"I think the larger question is: What has the state come to when battling corruption is seen a political conspiracy?"
Government opponents and corruption crusaders have called for anti-government marches at the weekend.
Protesters have already staged a smattering of marches this week, including dumping empty shoeboxes in front of branches of Halkbank, whose CEO Suleyman Aslan was one of those detained by police in the original raids.
Photos widely published in local media showed safes full of stacks of banknotes at the houses of Interior Minister Muammer Guler's son and media reports claimed shoeboxes of cash were found at Aslan's house. (Additional reporting by Orhan Coskun and Humeyra Pamuk; Editing by Ralph Boulton and Sonya Hepinstall)