(Updates with bond prices, quotes)
LONDON, Dec 27 (Reuters) - Turkish debt insurance costs surged to 18-month highs on Friday and dollar bond prices tumbled as investors were rattled by a deepening political crisis that has engulfed top politicians, police officers and businessmen.
The corruption scandal that has exposed fissures in the ruling AK Party before next year's elections has taken a heavy toll on Turkish financial markets, with stocks set for their worst weekly performance since 2008.
The cost of insuring exposure to Turkish debt in the credit default swaps (CDS) market hit 18-month highs of 253 basis points, more than 30 bps up from the previous close, according to data from Markit.
The 5-year CDS contract traded at 191 bps in mid-December just before the crisis erupted.
Prime Minister Tayyip Erdogan who faces calls to step down, suffered another setback on Friday as a court blocked a government attempt to force police officers to disclose investigations to their superiors.
"Political developments in Turkey over the past 10 days have introduced uncertainty into the system that has not been present for a number of years," Unicredit said in a note, adding that Erdogan faced a stiff test from the 2014 elections.
"Before these events, few questioned the ability of AKP to win the upcoming elections in the face of a disjointed opposition but this can no longer be considered a done deal."
Investors who generally view the AK Party as business-friendly, have been dismayed at the developments that come just months after mass anti-government protests in Istanbul and have dumped Turkish stocks and bonds.
Sovereign bonds have fallen sharply in recent days, with the 2034 dollar bond price down almost 3 points in price on Friday to trade at the lowest since May 2010.
The 2036 issue is also down 3 points, having fallen more than 7 cents in the dollar since mid-December. However both bonds still trade close to or above par.
Lira-denominated debt has also sold off heavily, with two-year yields rising 100 bps over the past two weeks to over 10 percent as the lira has hit record lows to the dollar
(Reporting by Sujata Rao; Editing by Alison Williams)