Turkey on Friday threatened to respond if the United States levied further sanctions over the detention of an American pastor, which has sparked a diplomatic standoff and battered the Turkish currency.
The lira had nosedived in recent weeks, hitting a record low of 7.24 this week, as investors anxious about fundamental economic problems in the country and a diplomatic and trade dispute with the United States.
In U.S. markets, the Dow Jones Industrial Average .DJI rose 396.32 points, or 1.58 percent, to 25,558.73, the S&P 500 .SPX gained 22.32 points, or 0.79 percent, to 2,840.69 and the Nasdaq Composite .IXIC added 32.41 points, or 0.42 percent, to 7,806.52.
"We've put sanctions on several of their cabinet members, working with you (President Donald Trump), we have more that we're planning to do if they don't release him quickly", Mnuchin told Trump during Thursday's cabinet meeting.
Debt rating downgrades typically mean higher borrowing costs as investors demand steeper interest rates to take on riskier debt.More news: Former assistant trump published a secret recording
Doubts about Turkey's future intensified as relations with the United States, a longtime North Atlantic Treaty Organisation ally, soured.
Trump later said in a tweet the United States "will pay nothing" for Brunson's release, "but we are cutting back on Turkey!"
The turmoil led ratings agency Moody's to downgrade Turkey's credit rating further into "junk" status and slap a "negative" rating on its outlook. "When anyone faces any charges, regardless of the person's citizenship, that person will have to go through the judicial process", he said.
Turkey's lira tumbled as much as 8.5 percent to 6.3 per dollar, having recovered ground rapidly in recent days.
Turkey's banking watchdog has taken steps to stabilise the currency, limiting futures transactions for offshore investors and lowering limits on swap transactions.
Turkey and its firms face repayments of almost US$3.8 billion on foreign currency bonds in October, Societe Generale has calculated.More news: Former Intel Chiefs: White House Using Security Clearances As A 'Political Tool'
Other emerging market currencies such as the South African rand and the Mexican peso dipped 1 percent and 0.6 percent respectively, dragged lower by the falling Turkish lira.
Investors are concerned that Turkey's has amassed high levels of foreign debt to fuel growth in recent years.
Investors gave Finance Minister Berat Albayrak the benefit of the doubt after a conference call on Thursday at which he tried to reassure them that Turkey would emerge stronger from the currency crisis.
Qatar pledged $15 billion in direct investments, economic projects, and deposits to support Turkey as it struggles with a currency crisis.
However, deep concerns remain about the potential for damage to the economy.
Turkish markets will be closed from midday on Monday for the rest of the week for the Muslim Eid al-Adha festival.More news: Starbucks Releases High-Protein Vegan Cold Brew Smoothies!