(Adds bonds, risk spreads, background)
BUENOS AIRES, Sept 2 (Reuters) - Argentine stocks cut their losses and bonds traded higher on Tuesday after President Cristina Fernandez said she would pay off $6.7 billion in defaulted Paris Club debt, which should ease access to foreign credit for local companies.
The benchmark MerVal share index was down 0.49 percent at 1,770.06 points at 1:45 p.m. local time (1645 GMT), rebounding from losses of up to 1.67 percent earlier in the session.
"The announcement is driving strong buying of banking stocks," said Marcelo Paccione, a trader at the ConsultCapital consulting firm.
Among the biggest gainers were Banco Frances (FRA.BA), trading up 7.08 percent and Grupo Financiero Galicia GFG.BA, which was up 8.97 percent after the announcement.
Argentine industry has suffered from limited access to foreign credit due to the unresolved Paris Club debt.
In the local debt market, Argentine bonds <AR/BONOS> extended earlier gains following the president's announcement for an average increase of 0.7 percent in mid-day trade. They were up 0.2 percent before Fernandez spoke.
Its yields spreads over U.S. Treasuries, considered a key measure of risk aversion, widened by 9 basis points at 1:45 p.m. to 680 basis points on the benchmark JPMorgan EMBI+ index 11EMJ .JPEMBIPLUS.
Argentina has been in default to the Paris Club of creditor nations since a 2001-02 economic crisis.
Fernandez's announcement came as many economists question Argentina's ability to meet hefty financing needs next year, amid high government spending and after the government sold 2015 bonds to ally Venezuela at a yield of nearly 15 percent.
Argentina's central bank has about $47 billion in foreign currency reserves, but the center-left government had previously refused to use these funds to pay off the debt. (Reporting by Jorge Otaola and Walter Bianchi; Writing by Helen Popper; Editing by Tom Hals)