UPDATE 1-Argentine president backs using reserves to pay debt

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* Argentine president defends debt repayment fund

* Judge orders consultations to decide government appeal

* Judge examining government appeal

* Ousted central bank president at work

(Recasts with comments from Argentine president, adds byline)

By Kevin Gray

BUENOS AIRES, Jan 11 (Reuters) - Argentine President Cristina Fernandez defended a plan on Monday to use foreign currency reserves to repay debt, saying it was vital to the country's drive to return to global credit markets.

The government plan to use billions of dollars in Central Bank reserves to make debt payments this year has set off an escalating political battle and shaken Argentine financial markets.

An Argentine judge ordered further consultations on Monday to decide an appeal by the government against an earlier ruling that reinstated sacked Central Bank Chief Martin Redrado, local media reported.

Fernandez issued a presidential decree firing Central Bank President Martin Redrado on Thursday for refusing to support the plan.

His ouster was overturned a day later by a federal judge, who also blocked Fernandez's plan to tap Argentina's foreign reserves to create a debt repayment fund aimed at guaranteeing the country's 2010 debt payments.

The turmoil at the central bank has highlighted political instability in Argentina at a time when Fernandez's cash-strapped government is working to woo investors and tap international credit markets for the first time after a massive debt default eight years ago.

Argentina plans to launch a debt swap later this month with holders of some $20 billion in defaulted bonds, paving the way for a bond issue.

Fernandez, speaking at a public appearance to announce new loans for wheat farmers, said the fund would help lower the country's borrowing costs.

"It's key that Argentina return to the capital markets but not paying 15 percent or 16 percent, but at reasonable rates," she said. "(The fund is helping) our bond prices improve, which will help us have a successful swap."

Argentine bond prices rallied for several months before sagging last week amid a dispute that has pitted Fernandez against her political opponents and set off a legal fight.

It was not immediately clear when Federal Judge Maria Jose Sarmiento would make her ruling on the government's appeal, which was filed over the weekend.

The Argentine peso ARSB= was flat in early trading on Monday. Stocks .MERV slipped after opening slightly higher as oil-related shares rose on a climb in global crude oil prices.

Locally traded Argentine bonds <AR/BONOS> rose 0.6 percent on average as investors bargain hunted after bond prices slid last week because of the dispute, traders said.

The row has effectively left Argentina with two central bank presidents. Fernandez named a replacement for Redrado, who returned to work on Friday after the judge's ruling and reportedly was in his central bank office on Monday.

Fernandez has defended the plan to use reserves, and her top aides have accused Redrado of plotting with the opposition to undermine her government, a charge he denies.

Opposition leaders have vowed to try to overturn the presidential decrees that set up the debt repayment fund and ousted Redrado.

They argue Fernandez is looking to use the funds to help free up government resources to increase social spending and boost her languishing popularity ratings in the run-up to the 2011 presidential election.

(Additional reporting by Helen Popper and Jorge Otaola) (Editing by Theodore d'Afflisio)