* Stocks, peso reverse early losses
* Bonds trade higher despite central bank tension (Updates to close)
By Jorge Otaola
BUENOS AIRES, Jan 7 (Reuters) - Argentine financial markets rebounded from early losses to end with light gains on Thursday despite concern over a dispute between the president and the central bank chief over using foreign reserves to pay debt.
The benchmark MerVal .MERV stocks index closed up 1.14 percent at 2,389.145 points, reversing earlier losses on bargain hunting a day after President Cristina Fernandez asked Central Bank President Martin Redrado to resign. For details see [ID:N07183139]
Government debt traded over the counter in Buenos Aires ended up 0.2 percent on average as medium-sized investors and state-run banks bought back bonds.
Among the biggest gainers on the local debt market was peso-denominated Discount paper ARDISCP=RASL, sliding 1.8 percent.
Fernandez asked Redrado to step down on Wednesday after he blocked her order to use some $6.6 billion in foreign currency reserves to repay debt. He refused to step down, saying only Congress can remove him.
Late on Thursday, she signed a decree firing him.
On the foreign exchange market, the peso closed up 0.19 percent at 3.8625/3.8675 per U.S. dollar ARSB= in informal trade between foreign exchange houses, as measured by Reuters.
In formal interbank trade, the peso rose 0.46 percent to close at 3.7925/3.7950 per dollarARS=RASL due to Central Bank intervention, traders said.
Argentina's debt spreads widened 12 basis points to 668 basis points over comparable U.S. Treasuries, according to JPMorgan's EMBI+ 11EMJ.
The cost to insure Argentina's debt with credit default swaps rose to an upfront cost of about 17.3 percent of the sum insured versus Wednesday's 15.9 percent. (With additional reporting by Sujata Rao-Coverley; Writing by Luis Andres Henao; Editing by Leslie Adler)