* MerVal stock index plunges 4.07 percent
* Locally-traded bonds sink 2.5 percent on average (Updates to close, adds byline)
By Jorge Otaola
BUENOS AIRES, May 20 (Reuters) - Argentine stock and bond prices sank on Thursday on fear of contagion from the euro zone debt crisis and lower-than-expected acceptance of the first phase of the government's exchange offer on defaulted bonds.
The benchmark MerVal stocks index .MERV closed 4.07 percent lower at 2,089.58 points.
Sovereign bond prices fell an average 2.5 percent in over-the-counter trade in Buenos Aires, according to Reuters pricing data. The dollar-denominated Discount bond dropped 5.3 percent to an ask price of 64.80 ARDISCD=RASL in local trade.
"On the global level, things are worse all the time since the euro zone situation has started to cause a certain capital flight from Brazil and that could seriously impact our market," said Ricardo Maied, trader at Federal Bursatil brokerage in Buenos Aires.
Maied said share prices were also reacting to the announcement late on Wednesday from Economy Minister Amado Boudou who said about 46 percent of Argentina's outstanding defaulted bonds have entered a swap offer. [ID:nN20146532]
The government is hoping for a floor acceptance rate of 60 percent in the $18.3 billion swap, which offers new bonds and cash to investors in exchange for the defaulted bonds, but at a steep discount to face value.
Investors have until June 7 to tender their bonds in the swap. Argentina aims to complete the swap to repair its reputation, which still suffers from a massive 2002 default, on global markets.
Argentina's country risk 11EMJ widened 72 basis points on Thursday to 854 basis points, its highest level since last September.