* Resigning deputy says corruption covered up
* Believes many colleagues will follow his lead
* Thousands of police reassigned (Adds MP's resignation)
By Gulsen Solaker
ANKARA, Jan 31 (Reuters) - A deputy of Turkish Prime Minister Tayyip Erdogan's ruling AK Party accused the government on Friday of "protecting thieves" and resigned from the party over purges of police and judiciary involved in a corruption investigation.
Turkish media reported that at least 700 more police officers had been reassigned over the investigation portrayed by Erdogan as part of a plot to undermine the country's economy and his government.
Muhammed Cetin's resignation was the eighth since the corruption scandal broke in December, though the party still controls 319 of 550 seats in the assembly.
"Unfortunately the AK Party has of today become blackened. It has become the architect of a process in which corruption is covered up, thieves are protected and the unlawful has become the law," Cetin told a news conference in parliament.
"There are many members of parliament who cannot stomach what is happening.
Cetin is close to Islamic cleric Fethullah Gulen, whom Erdogan accuses of using influence in police and judiciary to engineer the corruption accusations ahead of local elections next month. Gulen denies any part in the investigation.
A photograph in the Hurriyet daily on Friday showed staff at Istanbul's main courthouse carrying boxes of documents which the paper said were from the offices of two prosecutors removed from the investigation this week.
The turmoil generated by the investigation and the ensuing power struggle has added to woes in Turkey's financial markets that prompted the central bank to raise interest rates sharply this week to support the ailing lira.
More than 5,000 police officers have been dismissed or transferred in total since police raids on Dec. 17 that led to the arrest of businessmen close to Erdogan and three cabinet ministers' sons.
In the latest move, hundreds of police were transferred from their posts in Ankara and Izmir on Thursday, and dozens more were affected in Istanbul and the southeastern city of Gaziantep, Radikal newspaper reported.
A spokesman at police headquarters in Ankara could not immediately confirm the reports, but Cetin condemned the mass transfers.
"Thousands of people and their families have been dismissed and transferred to other places in arbitrary fashion without evidence of wrongdoing," he said.
UPHEAVAL IN JUDICIARY
A similar shake-up in the judiciary has left the fate of the corruption investigation unclear, with some 200 prosecutors and judges reassigned, halting an investigation which Erdogan has called a "judicial coup."
There is as yet no sign the graft scandal and Erdogan's purging of police and judiciary he sees as engineering it has produced any significant fall in his popularity.
The AK Party has won three elections since 2002. A hitherto-weak opposition sees local elections next month and a presidential poll later this year as an opportunity to make inroads into his vote.
When the corruption investigation first came to light, anti-government newspapers showed photographs of police removing shoeboxes full of money from an official's house.
The investigation has since faded from public view, and the removal of more prosecutors from the case this week has fuelled uncertainty about the inquiry.
The removal of the prosecutors was part of a reshuffle in which some 90 prosecutors were reassigned by newly appointed Istanbul chief prosecutor Hadi Salihoglu.
Erdogan's government has also relieved state employees of their duties at other institutions including the banking and telecoms regulator and the public broadcaster, firing dozens of executives.
Ratings agency Moody's said on Friday that pressure on the lira was likely to continue despite a rate hike of some 500 basis points this week, which it said had also significantly weakened Turkey's growth prospects.
(Writing by Daren Butler; Editing by Ayla Jean Yackley and Ralph Boulton)