UPDATE 1-U.S. judge freezes Argentine cenbank accounts

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* U.S. judge freezes $1.7 million in Central Bank assets

* Argentina's Boudou says embargo damages debt swap

* Analysts say reserves fund could draw further embargoes (Adds Boudou quotes on swap, bonds close, analyst)

By Helen Popper

BUENOS AIRES, Jan 12 (Reuters) - A U.S. judge has frozen accounts held in the United States by Argentina's Central Bank, deepening a legal and political row over the Argentine government's plan to use foreign reserves to repay debt.

Speculation had grown in Argentina in recent days that some holders of defaulted government bonds could try to get Central Bank funds embargoed because of a plan to use $6.6 billion in foreign currency reserves to service the nation's debt.

Economy Minister Amado Boudou said the embargo, which responded to a lawsuit by two funds holding defaulted Argentine bonds, was damaging the government's drive to carry out a debt swap but said the exchange remained on track.

"There's no doubt that what's being done is damaging the debt swap (but) it remains on track" Boudou told a news conference, referring to the restructuring of defaulted government debt due to launch later this month.

He said only $1.7 million in Central Bank funds had been seized, but news of the asset-freeze sent Argentine bonds plunging.

President Cristina Fernandez fired Central Bank chief Martin Redrado last week after he opposed her reserves plan, but a federal judge reinstated him a day later and blocked the transfer of the funds to the treasury.

The turmoil has rattled financial markets and highlighted political instability in Latin America's No. 3 economy just as Fernandez's cash-strapped government seeks to woo investors to be able to sell bonds for the first time since a massive debt default eight years ago.

Argentina plans to launch a debt swap later this month with the so-called holdouts, who hold some $20 billion in defaulted bonds. The swap is meant to pave the way for a bond issue to ease tight state finances.

BONDS SINK

The peso-denominated Discount bond ARDISCP=RASL closed down 8.0 percent moments after a Central Bank spokesman confirmed the latest embargo on Argentine assets initiated by U.S. District Court Judge Thomas Griesa.

Griesa is handling a series of lawsuits brought by bondholders, known as "holdouts" because they rejected a 2005 restructuring of Argentina's defaulted bonds that involved investors taking a massive discount.

Government bonds traded over the counter in Buenos Aires fell by an average of 3.0 percent on the news, deepening earlier losses over the Central Bank dispute.

Economic analysts said the U.S. court action suggested the president's plan to use part of the Central Bank's $48 billion in reserves could prompt bondholders to seek further asset freezes.

"This appears to show that Martin Redrado's fears (about the reserves fund) were well-founded," said Aldo Abram of the Exante consulting firm, adding the government would be able to meet debt obligations of some $13 billion this year even without tapping Central Bank reserves. (With additional reporting by Kevin Gray, Eduardo Garcia, Jorge Otaola and Manuela Badawy in New York; Editing by Diane Craft)