* TRY firms into New York trading

* Erdogan announces measures to encourage lira savings

* Chile markets take a breather after selloff

Dec 21 (Reuters) - The Turkish lira extended its rally from record low levels on Tuesday as investors assessed how effective the government's anti-dollarization plan will be in stemming a rout in the currency hit by a low-rates policy and soaring inflation.

The lira firmed slightly to trade at 12.60 per dollar in New York morning trade, but was off the session's strongest level at 11.09.

It swung from an all-time low of 18.4 to the dollar to close at 13.15 on Monday with an eye-popping 25% rally after President Tayyip Erdogan unveiled steps that included plans to protect local currency savings against currency fluctuations.

Turkey's Finance Ministry said on Tuesday the scheme would be applied to lira deposits with maturities of three to 12 months, and based on the central bank policy rate.

"It clearly offers some reprieve for the Turkish lira, as the value of TRY deposits are guaranteed and there is no cost in the short term because the hedging is done via swap transactions," said Regis Chatellier, director of EM strategy at Oxford Economics.

"But as opposed to some comments we can read at present in the market, these measures are not equivalent to a rate hike. If you combine the subsequent deterioration in public finances and inflation pressures, it is then likely that downward pressure on TRY will resume at some point."

The lira FX volatility gauges hit all-time highs, while its export-oriented BIST 100 index fell nearly 8% after market-wide circuit breakers were triggered during the session. The main banking index fell more than 2%.

Overall developing world markets clawed back some of Monday's losses after worries about fresh COVID-related restrictions dampened appetite for risky assets.

The Chilean peso firmed marginally after sinking to 2020 lows on Monday in the wake of a resounding presidential election victory by leftist Gabriel Boric, who has pledged to shake up the country's market-oriented economic model.

Santiago stocks rose 2%, leading the region's stocks markets higher.

In Brazil, shares of planemaker Embraer SA soared 14% after the company said it had agreed to combine its electric aircraft subsidiary Eve with Zanite SPAC and list it on the New York Stock Exchange. (Reporting by Sruthi Shankar in Bengaluru; editing by Jason Neely)