Central bank row hangs over Argentine markets

BUENOS AIRES (Reuters) - Argentine stocks fell on Monday while bonds ended almost flat in light trade marked by persistent investor caution due to a row over government plans to tap foreign currency reserves to pay debt.

The benchmark MerVal stocks index .MERV closed down 1.48 percent at 2,317.74 points, dragged down by banking shares. Grupo Financiero Galicia (GFG.BA) fell 4.2 percent to 2.05 pesos per share, affected by losses by major bonds.

Argentine banks are big holders of government bonds, making the fortunes of their shares closely linked to the debt market.

"It's clear that investors may not take decisions until the situation is resolved. ... In this scenario (traders) prefer to make choices that don't carry high risk in Argentina, like oil companies," said Francisco Marra, a trader at the Bull Market Traders brokerage.

President Cristina Fernandez fired the central bank chief, Martin Redrado, by decree last week after he refused to free billions of dollars in foreign reserves to pay the public debt -- a move the opposition says is unconstitutional.

A court reinstated Redrado and barred the government from tapping the reserves. A special Congress committee could meet later this week to discuss whether Fernandez overstepped her authority firing Redrado by decree.

Despite the uncertainty, bond prices closed up by an average 0.1 percent in over-the-counter afternoon trade in Buenos Aires, trimming earlier gains of as much as 0.6 percent as many of the most heavily traded bonds fell by up to 1.6 percent.

Among the gainers was peso-denominated Discount paper, which rose 1.3 percent.

The risk spread on Argentine bonds narrowed by 24 basis points to 661 basis points over comparable U.S. treasuries, according to the benchmark J.P. Morgan Emerging Market Bond Index.

In formal interbank trade, the peso currency rose 0.13 percent against the dollar to end at 3.7925/3.795 in trade monitored closely by the Central Bank to avoid bigger fluctuations, traders said.

In informal trade between foreign exchange houses, the peso also firmed 0.13 percent to close at 3.865/3.87 peso per U.S. dollar.

(Writing by Eduardo Garcia and Helen Popper; Editing by Leslie Adler)