Ruling Turkish Coalition Collapses : Politics: Newly elected party leader creates upset by ending junior partnership in government. Move drags down prime minister, imperils Europe free-trade deal.

ISTANBUL, Turkey — This nation’s ruling coalition collapsed Wednesday, dragging down the prime minister and jeopardizing reforms vital for a 1996 free-trade deal with Europe.

The unexpected upset was caused by Deniz Baykal, 57, elected 10 days ago as the new leader of the social-democratic Republican People’s Party. He decided to end the junior partnership he inherited as part of an awkward 4-year-old coalition with Premier Tansu Ciller’s center-right True Path Party.

“This Parliament is finished, this coalition is finished. We need a new Parliament, we need a new start . . . [and] immediate general elections,” Baykal said after three hours of talks with Ciller failed to save the government of this North Atlantic Treaty Organization ally that bridges Europe and the Middle East.

The 49-year-old Ciller formally resigned and was asked by President Suleyman Demirel to stay on as caretaker premier as she tries to form a new government. She seemed determined not to move up elections scheduled for fall of 1996.

“The country does not need an election; it needs a government of solutions. Let nobody worry about anything,” said Ciller, looking unruffled and worthy of the title “Lady with the Iron Smile,” earned during her turbulent two years in power.

But expectation of weeks of political crisis and economic uncertainty sent the Istanbul stock exchange index plummeting. The Turkish lira dropped slightly.

Turkish commentators expressed concern about the effect of the crisis on the country’s relations with Europe. The European Parliament plans to vote in December on a trade pact with Turkey, due to go into effect Jan. 1, 1996.

The free-trade deal would not only expand the already substantial commerce between Turkey and Europe but also provide an important Western framework for Turkey’s progressive institutions and reformers.

But the European Parliament has demanded signs of progress in human rights. European Parliament members want to see the lifting of the notorious Article 8 of Turkey’s anti-terror law, which permits the jailing of dissidents for speaking out, and the freeing of six former Kurdish parliamentary deputies jailed last year for alleged links to separatist rebels.

The current crisis is expected to undermine the leadership and consensus needed in Turkey to battle right-wing conservatives on such reforms, although Ciller and Baykal are strong supporters of reform and integration with Europe.

The big center-right Motherland Party has also pledged to improve relations with Europe. Motherland leader Mesut Yilmaz has offered to discuss a new coalition with Ciller. But Yilmaz has insisted on early elections, and it is unclear if he and Ciller can overcome their rivalry to unite.

“We are open to any formula of government,” Yilmaz told one private television station. “This development is not a surprise for us. This coalition government has wasted the past four years.”

Also gloating over the crisis were the Islamists of Turkey’s Welfare Party, which some opinion polls show could outperform other parties in a general election. The often-moderate Islamists won city halls across the Muslim-dominated country last year, but no poll predicts that they will win an absolute majority in Parliament.

Adding to a sense of unrest in Turkey was the start on Wednesday of a series of rolling strikes by 160,000 public-sector workers angered that their pay raises have fallen behind because of inflation, now about 77% annually.

Ciller has put her faith in an austerity program backed by the International Monetary Fund, as well as in large-scale foreign borrowing and a rebounding growth rate.

But Baykal said he is fearful that his party’s social-democratic credentials could be completely eroded by further association with the government.