(Updates prices, adds local debt market)
By Jorge Otaola
BUENOS AIRES, Jan 6 (Reuters) - Argentine financial markets fell in early trade on Wednesday as a dispute between the Central Bank and the government over plans to use foreign currency reserves to pay debt rattled investors.
Government bonds traded over the counter in Buenos Aires fell 0.8 percent on average in opening deals, and stocks also sank. Medium-sized investors led the debt sales, dumping dollar-denominated Par paper ARPARD=RASL, which sank 1.6 percent.
The benchmark MerVal .MERV stocks index fell 1.32 percent to 2,369.95 points after President Cristina Fernandez asked Central Bank President Martin Redrado to resign. Redrado said through a spokesman he would not leave unless Congress orders him to do so. For details see [ID:nN06139020]
In the foreign exchange market, the peso weakened 0.26 percent to 3.805/3.810 per dollar ARS=RASL in formal interbank trade.
In trade between foreign exchange houses, as measured by Reuters, the local currency weakened 0.26 percent to 3.865/3.870 per U.S. dollar ARSB= in light volume.
Rising tensions between the center-left government and the central bank increases perceptions of risk and uncertainty in Argentina at a time when it is trying to assure investors it is ready to return to global bond markets with a major debt issue.
The MerVal closed at two consecutive record highs on Monday and Tuesday as rising commodity prices boosted local oil sector stocks and as bank stocks jumped on expectations the government would soon complete a swap of defaulted debt that has lifted sovereign bond prices. (Writing by Helen Popper and Fiona Ortiz; Editing by Padraic Cassidy)