UPDATE 5-Argentina's peso extends rally on high-yield bond sales

(Adds central bank estimates for year-end inflation and economic performance)

BUENOS AIRES, Oct 2 (Reuters) - The Argentine peso rallied for a second straight day on Tuesday after the central bank issued another round of short-term bonds with high interest rates aimed at mopping up liquidity in the thin foreign exchange market, traders said.

The peso closed 3.67 percent stronger at 38.15 per dollar, a gain of 8.26 percent since the start of the week.

The central bank sold $1.398 billion (52.815 billion pesos) in seven-day “Leliq” notes on Tuesday, with an annual interest rate of 69.465 percent, according to traders.

That came on the heels of a jump in the peso on Monday following the central bank’s initial sale of $1.78 billion of seven-day “Leliq” notes with an annual interest rate of 67.175 percent.

The bank has said it plans to issue Leliq debt on a regular basis as the country battles inflation, which economists predict will top 44 percent by the end of the year, according to a central bank poll released on Tuesday.

The poll showed that economists are predicting that the economy will contract 2.9 percent by the end of 2018, compared to a 1.9 percent contraction previously expected.

This week’s currency rally followed a pounding for the peso, which had lost more than half its value against the dollar in 2018.

The Leliq auctions are intended to reduce the amount of pesos available for investors to put to work buying safe-haven U.S. dollars.

A $57 billion International Monetary Fund standby financing deal reached last week, upgraded from an original $50 billion, includes sharper spending cuts and tax hikes aimed at wiping out the country’s primary fiscal deficit, which is expected to equal 2.6 percent of gross domestic product this year.

Argentina is struggling to break free from cyclical financial crises that have hit the country every decade over the past 60 years.

“We believe that the freshly rejiggered financial program agreed with the IMF addresses the fulcrum of the Argentine curse: fiscal deficits ... ,” Argentine brokerage firm Balanz said in a note to clients on Tuesday.

Finance ministers from the Group of Seven leaders said in a statement on Tuesday afternoon that they “strongly support the commitment and determination” of Argentine authorities to stabilize the economy.

The IMF agreement also calls for the peso to trade in a range of 34 to 44 per U.S. dollar, effective from Monday.

The central bank, which has spent almost $16 billion in reserves to prop up the peso so far this year, has agreed with the IMF not to intervene in the foreign exchange market as long as the peso remains in that band. (Reporting by Jorge Otaola, Cassandra Garrison, Walter Bianchi and Scott Squires in Buenos Aires Additional reporting by Fergal Smith in Toronto Editing by Frances Kerry, Matthew Lewis, Toni Reinhold)