EMERGING MARKETS-Stocks, FX drop on capital control worries

* Emerging stocks fall, FX weakens on capital controls fears

* Turkey under pressure from political risk worries

* Romanian leu hits 5-week high ahead of election

By Carolyn Cohn

LONDON, Nov 19 - Emerging stocks dropped by one percent on Thursday and currencies weakened as investors eyed the spread of capital controls in emerging markets.

Russia could discuss various options to limit inflows, including taxes, but had no immediate plans, a central bank official said on Thursday, a day after Brazil unveiled a new tax to curb capital inflows. [ID:nN18128104]

Taiwan and Colombia are among other countries attempting to cap the export-damaging strength of their currencies through capital controls, and investors are speculating about similar proposals in several other emerging economies.

Hot money is already flowing back into emerging markets, barely a year after it flooded out following the collapse of Lehman Brothers, as investors fret at the low interest rates on offer in developed markets.

However, volumes are unusually thin, even in the run-up to the year-end, analysts say.

"The fact that markets are focusing on capital controls is a reflection of the fact that nothing else is going on," said Lars Christensen, emerging markets strategist at Danske in Copenhagen.

"Volumes are very low, everybody feels valuations are too stressed. As we approach year-end, no one wants to take on additional risk."

Benchmark emerging equities <.MSCIEF> fell by 1 percent, easing off 15-month highs set in the previous session, although emerging sovereign debt spreads edged in by 2 basis points to 303 bps over U.S. Treasuries <11EMJ>.

Emerging European currencies were generally weaker, and the commodity-driven rand <ZAR=> dropped 1.5 percent, as gold eased from record highs.

The Turkish lira <TRY=> and Israeli shekel <ILS=> hit two-week lows against the dollar.

Turkey's benchmark 2030 bond <TRGLB30=RR> also fell, with Turkish markets under pressure on political risk worries, due to an investigation into allegations the government authorised wiretapping of judges.

"Tensions are running very high in Turkey at the moment...it might be worthwhile to lighten up risk," said Tim Ash, head of CEEMEA research at RBS, in a client note.

The Turkish central bank is expected to cut rates by 25 bps later on Thursday, to a record low 6.5 percent.

The rouble fell against its euro-dollar basket <RUS=MCX>, bucking the strengthening trend of recent sessions.

Russia's central bank said it could cut rates further before the end of November, but confirmed its current floating trading band at 35-38 roubles.

However, the Romanian leu <EURRON=> briefly hit a five-week high against the euro before the first round of presidential elections on Sunday, with the eventual winner given the responsibility of choosing the next prime minister who will lead talks with the International Monetary Fund.