Prime Minister Tayyip Erdogan struck a defiant note, declaringing he would not yield to the protesters, while in a further sign of the effects the 10-day-old crisis has had on markets, the central bank said it would intervene if needed to support the lira.
"They say the prime minister is rough. So what was going to happen? Were we going to kneel down in front of these (people)?" Erdogan said after the action started. "If you call this roughness, I'm sorry, but this Tayyip Erdogan won't change."
Riot police backed by armoured vehicles moved into Taksim Square, epicentre of more than ten days of protest, soon after dawn. Bulldozers began removing barricades made of paving stones and corrugated iron.
What began as a protest at redevelopment plans for Gezi Park, a leafy corner of the square, has grown into an unprecedented challenge to Erdogan, who has governed for over 10 years. Victor in three consecutive elections, he says the protests are engineered by vandals, terrorist elements and unnamed foreign forces.
"A comprehensive attack against Turkey has been carried out," Erdogan told parliamentary group meeting of his AK Party. "The increase in interest rates, the fall in the stock markets, the deterioration in the investment environment, the intimidation of investors - the efforts to distort Turkey's image have been put in place as a systematic project," he said.
The unrest has knocked investor confidence in a country long one of the world's best performing emerging markets, and the lira, already suffering from wider market turmoil, fell to its weakest against its dollar/euro basket since October 2011. The cost of insuring Turkish debt against default rose to its highest in ten months, although it remained far from crisis levels.
Western allies have expressed concern about the troubles in a key NATO ally bordering Syria, Iraq and Iran. Washington has held up Erdogan's Turkey as an example of an Islamic democracy that could be emulated elsewhere in the Middle East.
The police move came a day after Erdogan agreed to meet protest leaders, whose peaceful demonstrations two weeks ago spiralled into anti-government protests in cities across the country in which three people have been killed.
"I invite all demonstrators, all protesters, to see the big picture and the game that is being played," Erdogan said. "The ones who are sincere should withdraw ... and I expect this from them as their prime minister."
Police removed huge banners hung by protesters from a building overlooking Taksim but the local governor said they had no intention of breaking up a peaceful campaign against government redevelopment plans inside the adjoining Gezi Park, where the demonstrations first began. Riot police moved into the park briefly, then withdrew.
"Our aim is to remove the signs and pictures on the Ataturk statue and the Ataturk Cultural Centre. We have no other aim," Istanbul Governor Huseyin Avni Mutlu wrote on Twitter.
Police hung a single Turkish flag and picture of the founder of the Turkish secular state, Mustafa Kemal Ataturk, from the building. Protesters accuse Erdogan of an authoritarian rule and some suspect him of ambitions to replace the secular republic with an Islamic order - something Erdogan denies.
Crowd control vehicles fired water cannon against groups of protesters who threw stones, fireworks and petrol bombs at the police on the edge of the square. Hundreds more protesters, many wearing face masks and builders' helmets, gathered on steps leading from the square to the park.
"This movement won't end here. We've started something much bigger than this park ... After this, I don't think people will go back to being afraid of this government or any government," said student Seyyit Cikmen, 19, as the crowd chanted "Every place is Taksim, every place resistance."
Police appealed to the protesters not to throw rocks, calling from loudspeakers, "Dear Gezi friends. We are unhappy with this situation. We don't want to intervene. We don't want to harm you. Please withdraw."
Turkey's Medical Association said that as of late Monday, 4,947 people had sought treatment in hospitals and voluntary infirmaries for injuries, ranging from cuts and burns to breathing difficulties from tear gas inhalation, since the unrest began more than ten days ago.
Erdogan has repeatedly dismissed the protesters as "capulcular", or riff-raff. But Deputy Prime Minister Bulent Arinc said on Monday leaders of the Gezi Park Platform group had asked to meet him and Erdogan had agreed. A meeting was expected on Wednesday.
Erdogan has made many democratic reforms, taming a military that toppled four governments in four decades, starting entry talks with the European Union, reining in rights abuses by police and forging peace talks with Kurdish rebels to end a three-decades-old war that has cost 40,000 lives.
His AK Party has taken Turkey from a crisis-prone economy to Europe's fastest-growing over the past decade, and has won three successive elections, each time with a higher share of the vote. But the protests have shaken Turkey's reputation for stability.
The ferocity of the initial police crackdown has drawn criticism from the West and Erdogan has increasingly accused foreign forces of trying to aggravate the troubles.