By Ezgi Erkoyun and Daren Butler

ISTANBUL (Reuters) – A Turkish court ruled on Wednesday that an American pastor be transferred from jail to house arrest, his lawyer said, after nearly two years in detention on terrorism charges in a case which has strained ties between Ankara and Washington.

Andrew Brunson, a Christian pastor from North Carolina who has worked in Turkey for more than 20 years, was detained in October 2016 and indicted on charges of helping the group which Ankara says was behind a failed military coup earlier that year.

Brunson’s lawyer Ismail Cem Halavurt confirmed Turkish media reports that the court had ruled for him to be moved to house arrest. He will have to wear an electronic ankle bracelet and is banned from leaving the country, Halavurt said.

A week ago the same court rejected a call by Brunson’s defense for his release. State-owned Anadolu news agency said the court decided, after re-evaluating the case, that he could leave prison on health grounds and because he would be under effective judicial control.

It said Brunson’s defense had been completed and evidence for the case was almost all collected.

Brunson’s detention deepened a rift between NATO allies Washington and Ankara – also at odds over the Syrian war and Turkey’s plan to buy missile defenses from Russia – and financial markets took his transfer order as a positive sign.

The Turkish lira strengthened to 4.8325 against the dollar from 4.8599 before the report. Shares in Halkbank, whose former deputy general manager was convicted in January of evading U.S. sanctions on Iran, jumped 12 percent.

Brunson was indicted on charges of helping supporters of Fethullah Gulen, the U.S.-based cleric who Turkish authorities say masterminded the coup attempt against President Tayyip Erdogan in which 250 people were killed. He was also charged with supporting outlawed PKK Kurdish militants.

The pastor, who denies the charges, faces up to 35 years in jail if found guilty.

Erdogan has previously linked his fate to that of Gulen, whose extradition from the United States has been a long-held demand of Turkish authorities. Gulen denies any involvement in the coup.

President Donald Trump said in a tweet last week that Brunson was being held hostage and that Erdogan should “do something to free this wonderful Christian husband & father”.

The U.S. Senate passed a bill last month including a measure that prohibits Turkey from buying F-35 Joint Strike Fighter jets because of Brunson’s imprisonment and Turkey’s purchase of Russia’s S-400 air defense system.

(Reporting by Daren Butler and Tuvan Gumrukcu; Writing by Dominic Evans; editing by David Stamp)