BUENOS AIRES, Jan 8 (Reuters) - Argentine stocks rebounded on Tuesday from a three-and-a-half-month low as investors snatched up Petrobras' Argentina unit on rumors of a pending share buyback, which the company denied.
Also, the peso currency surged to its strongest level in two months as the market absorbed a flow of dollars from agricultural exports.
The MerVal index .MERV of 42 leading stocks jumped 1.76 percent to 2,140.90 points. On the broad market, volume was moderate at $37.2 million. Of active shares 36 rose, 33 fell and 12 were unchanged.
Shares of heavily weighted Petrobras Participaciones PCH.BA, the Argentine unit of the Brazilian state oil company Petrobras (PETR4.SA), zoomed up 6.88 percent to 5.12 pesos per share.
A Petrobras source in Brazil told Reuters that rumors that the parent company would buy back shares of its Argentine unit "make no sense." The source asked not to be identified.
"There was also an important flow (of buyers) toward Telecom, the stock that has been the most punished in recent weeks," one trader said.
Telecom (TEC2.BA), a major Argentine telephone company, soared 6.39 percent to 14.15 pesos per share.
Sovereign bonds rose an average 0.7 percent on the local market as investors reacted positively to 2007 inflation data released on Monday.
Almost 40 percent of locally traded government debt is indexed to inflation, which came in at 0.9 percent in December, close to what the market expected.
In interbank trade the peso rallied 0.24 percent to 3.1275/3.1300 per U.S. dollar ARS=RASL and would have closed even stronger if the Central Bank had not intervened from early in the session to put a brake on the rise, traders said.
"There are a lot of dollars running around and you see that in the market. If the Central Bank had not put limits on it, the market would have been a lot lower," one trader said.
The peso closed flat against the dollar in informal trade between foreign exchange houses, as measured by Reuters, ending at 3.1725/3.1750 per dollar ARSB=. (Reporting by Jorge Otaola, translating by Fiona Ortiz)