"The heightened tensions between the USA and Turkey caused the Turkish lira to take a leg lower, and this reignited fears that the European banking system could be shaken by either defaults or non-performing loans from Turkey", said market analyst David Madden at CMC Markets UK.
William Jackson, chief emerging markets economist at London-based Capital Economics said in a note that Albayrak gave a "moderately convincing performance". Investors, already anxious about Turkey's economy, were irked by a diplomatic and trade dispute with the United States over the continued detention of an American pastor Andrew Brunson on espionage and terror-related charges.
USA stocks climbed in afternoon trading after a Mexican economic official told reporters that trade talks between the United States and Mexico were "advancing well".
The greenback fell 0.53 percent against the Mexican peso MXN=, after Mexico's economy minister Ildefonso Guajardo said he hopes to conclude by the middle of next week outstanding bilateral issues with the United States surrounding the renegotiation of the North American Free Trade Agreement (NAFTA).
The yuan last stood at 6.8794 per dollar, down 0.25 percent on the day but still off Wednesday's 19-month low of 6.9587.
The lira plunged to a record low of 7.24 on Monday before mounting a three-day rebound, helped by factors including measures by the Turkish central bank to support its currency and Qatar's pledge to invest $15 billion in Turkey.
Andrew Brown, from Post Office Travel Money, said: 'Sales of the Turkish lira have been rising all year when it became clear that holiday costs in resorts like Marmaris had been falling steadily as sterling surged in value.
The Turkish lira weakened to 5.86 against the dollar on Friday from its previous close of 5.8150 as investors weighed up a U.S. warning that Turkey should expect more economic sanctions unless it hands over detained American pastor Andrew Brunson.
Memories of past emerging market crises, such as the Asian financial crisis of 1997 and Turkey's 2001 crisis, came back to haunt investors this week and prompted a wave of selling across emerging market assets as a whole. That left emerging market stocks in a technical bear market, or a 20 percent drop from recent highs.
European banks.SX7P and copper CMCU3 also fell into bear market territory.
The currency has recovered from record lows earlier this week.
Other emerging bourses delivered a mixed performance with Polish shares down 0.7% while South Africa stocks leapt 1.3%.
The pound rose 0.12 percent on Thursday after 10 straight days of falls though concerns about a hard Brexit continued to undermine the sterling.