ANKARA (AFP) - Turkish Prime Minister Ahmet Davutoglu said Thursday that coalition talks with the main opposition party had failed, paving the way for snap legislative elections as Ankara battles its biggest security crisis against militants in years.

The ruling Justice and Development Party (AKP) lost its overall majority in June 7 polls for the first time since it came to power in 2002, in a major setback for its co-founder President Recep Tayyip Erdogan.

AKP leader Davutoglu and Republican People's Party (CHP) leader Kemal Kilicdaroglu had held a one-and-half hour meeting in Ankara in what was seen as a final chance to agree a coalition government.

"We have not been successful in assuring a favourable base for the creation of a government," Davutoglu said at AKP headquarters afterwards, insisting the ruling party had "done its best".

Davutoglu said AKP negotiators had offered a "medium-term reform government" to the CHP but "no common ground has been found".

He said there was a "strong possibility" of early elections, adding: "Actually, the snap elections have become the only option for Turkey".

New polls will come at a time when Turkey is fighting a cross-border offensive against Islamic State in Iraq and Syria (ISIS) militants in Syria and Kurdistan Workers' Party (PKK) militants in northern Iraq and risk causing further political and economic uncertainty.

The prospect of early elections unnerved markets, with the Turkish lira losing 1.85 per cent in value against the dollar to hit a new record low.

"Political uncertainty and social unrest in Turkey will continue at least another four to five months, which will kill consumer sentiment and investment appetite," said Ozgur Altug, chief economist at BCG Partners in Istanbul.

'HISTORIC CHANCE MISSED'

Davutoglu gave no date for early elections, which some observers expect as soon as October or November.

But he said: "I would rather the elections take place as early as possible."

Analysts have suggested Erdogan all along wanted to see a re-run of the election so the AKP could regain an overall majority and realise his dream of creating a presidential system in Turkey.

"The party which will benefit the most from the early elections is the AKP, we can form a single party government with just 18 seats more," said Davutoglu.

Kilicdaroglu blasted the attitude of the AKP, saying it never showed any interest in forming a long-term and sustainable four-year coalition.

"We never received a coalition offer from the Davutoglu. He gave us only two options: a short-term election government or support for an AKP minority government," he said at CHP headquarters.

"I believe that Turkey has missed a historic opportunity... It is wrong to view early elections as the only alternative."

'ERDOGAN WANTED SNAP POLLS'

Erdogan has said he did not have the authority to extend an Aug 23 deadline to reach a coalition deal, but several commentators cast doubt on this.

"If he (Erdogan) thinks a government may be formed, he may extend this period," wrote columnist Mehmet Yilmaz in the Hurriyet daily.

"But he will not do such a thing because, indeed, he does not want a coalition - he favours snap elections."

The pro-government press has in recent days published opinion polls suggesting the AKP would improve on its June 7 score of just under 41 per cent if a new election was held.

"Will an election change the result? That is unknown," wrote commentator Abdulkadir Selvi in the pro-government Yeni Safak daily.

The main reason for the AKP's failure to win an overall majority was the strong performance of the pro-Kurdish Peoples' Democratic Party (HDP), which won more than 13 per cent of the vote.

Critics have suggested that Erdogan ordered the security operation with the aim of discrediting the HDP by linking it to the outlawed PKK in order to harm its chances in a vote.

The government has denied the claims.

Turkey's initial air strikes against ISIS targets were warmly welcomed by the West but Ankara then triggered concern by concentrating its firepower against PKK rebels in Iraq.

US warplanes on Wednesday carried out their first air strikes against ISIS targets in Syria after taking off from a Turkish air base and analysts now expect Turkey may now play a fuller role in the coalition.