(Updates with peso's close)
BUENOS AIRES, Nov 4 (Reuters) - Argentina's peso currency rose sharply against the dollar on Tuesday while stocks traded higher as banking stocks rallied thanks to a recovery in sovereign debt prices.
In late afternoon trade, the benchmark MerVal .MERV stocks index was trading up 5.5 percent at 1,115.84 points in its sixth straight session of gains.
"We're seeing investors reshuffling their portfolios and putting banks at the forefront," said Claudio Szlaien, an analyst at Marlon Financial Resources.
Argentine banks are among the biggest holders of government bonds traded on the local market, which were up nearly 4 percent on average. They rose more than 6 percent on Monday.
Local Argentine debt prices fell 60 percent on average last month because of the global financial crisis and a government plan to take over private pension funds, but bargain-hunting has boosted them in recent sessions.
On the foreign exchange market, the peso closed sharply higher in light trade due to increased control by the Central Bank, including new restrictions on short-term financial operations, traders said.
Under rules announced on Monday, banks must hold onto bonds and stocks for at least three days. The measure aims to curb short-term buying and selling that causes abrupt movements in financial markets and to stem the dollar's rise.
In recent weeks, the peso has dipped to levels not seen since a 2002 economic crisis amid stronger demand for safe-haven greenbacks. The Central Bank has sold millions of dollars in foreign reserves to prop up the local currency.
Traders said Central Bank staff had been visiting foreign exchange houses in an apparent effort to reduce trade.
In an unusually sharp one-day rise, the peso closed up 2.65 percent to 3.29/3.30 per dollar in formal trade between banks ARS=RASL where the central bank routinely intervenes with sales or purchases of dollars.
In informal trade between foreign exchange houses, as measured by Reuters, the peso firmed 1.48 percent to 3.37/3.38 per dollar ARSB=. (Reporting by Jorge Otaola and Walter Bianchi; Writing by Helen Popper; Editing by Kenneth Barry)