In a dramatic session of parliament, after posting of the 11-minute audio tape on YouTube, Mr Erdogan said his political enemies had penetrated encrypted state communications. He did not name the opponents but made it clear he was talking of a network run by former ally, Islamic cleric Fethullah Gulen.
Supporters of Mr Erdogan, who are locked in a power struggle with Mr Gulen whom he accuses of contriving a fraud scandal to topple him, shouted "Tayyip, we came here to die with you", "stand tall, don't bow" and "time is on our side".
Mr Erdogan called back to loud cheers and applause from the public gallery: "The people don't believe these lies."
The Prime Minister added: "They went and made a shameless montage and released it. They are even listening to the state's encrypted telephones. That's how low they are. There is no allegation we cannot answer."
The "they" cited by Mr Erdogan was a clear reference to those among the followers of US-based Islamic cleric Gulen he accuses of building a "parallel state" in Turkey, using power in the judiciary and police to undermine him.
The recording is purportedly of Mr Erdogan and his son Bilal discussing how to reduce the funds to "zero" by distributing them among several businessmen. At one point, the voice supposedly of Bilal says some £28 million remain to be disposed of.
Government officials said previous such recordings may have been of ministers and businessmen's voices but the conversations were put together from comments taken out of context to give the impression of impropriety.
One senior official said: "They have wiretapped the Prime Minister for 18 months and then out of the 18 months of wiretapping they take two or three sentences."