The prime minister had earlier triggered the crisis, by walking out of a meeting with President Ahmet Necdet Sezer, saying that he had been insulted.
The Treasury reassured investors that there was no question of a currency devaluation.
Panicky banks bought $5bn on Monday, the biggest single day's purchase of dollars in Turkey's history, fearing that a political row would see a crucial IMF loan blocked and the economy thrown into turmoil.
The treasury has also drastically scaled back its scheduled auction of domestic debt.
Stock markets responded as desired, with the main Istanbul index making small gains to close the day 0.9% higher.
Fearful investors
Turkish shares fell almost 15% on Monday.
Investors feared that a political row between the Turkish president and Prime Minister would block $7.7bn of emergency aid from the International Monetary Fund (IMF).
The IMF has agreed to release the money on the condition that Turkey speeds up the privatisation of its energy and telecoms sectors, and reforms its banking sector.
Any signs that reforms are not taking place, could lead the IMF to withdraw its offer of a loan and lead to an economic crisis.
Soothing words
Prime Minister Bulent Ecevit tried to soothe the markets later in the day.
"The government is doing its job and will continue to implement the economic programme and structural reforms with determination," said Mr Ecevit.
"We will take every possible measure to avoid an economic crisis," he added.
The prime minister had earlier triggered the crisis, by walking out of a meeting with President Ahmet Necdet Sezer, saying that he had been insulted.
But the nervousness on the stock markets was difficult to abate.
"No matter how many times the government announces that it will continue its good work, without solving the problem at the top of the State, the market looks set downward," said Mohac Ozbayri of Hak Securities.
The main ISE National-100 index closed on Monday at 8,683 points, down 14.62% from 10,169 points at the start of trading.
Strict adherence
In December, the IMF agreed to loan Turkey $7.6bn to alleviate balance of payment difficulties, on top of the $3.8bn it had received the previous year.
Of this total, Turkey has only drawn $3.7bn, meaning that the IMF could still withdraw Turkey's rights to $7.7bn.
"Strict adherence to the monetary, fiscal and the structural reform programme is needed," warned Horst Kohler, managing director of the IMF, at the Fund's latest review of Turkey earlier this month.
But Mr Kohler also praised Turkey's progress with reforms, especially the central bank's implementation of the monetary framework policy.
The dispute between the Prime Minister and the President came at a bad time, since Mr Ecevit met the IMF's deputy managing director, Stanley Fischer later on Monday afternoon.
The IMF has remained silent on the outcome of the meeting.