(Updates with closing prices, fresh quotes)
By Jorge Otaola
BUENOS AIRES, Aug 12 (Reuters) - Argentine bonds ended with light losses on Tuesday despite government purchases of locally traded debt a day after Standard & Poor's cut the country's sovereign debt ratings.
Bonds traded in Buenos Aires <AR/BONOS> were higher for most of the session, but closed down 0.2 percent on average in over-the-counter trade amid investor gloom over the ratings downgrade and July's inflation figure, which was even lower than expected.
"Bonds are feeling downward pressure due to sales by private investors who doubt the accuracy of the government's (inflation) figures, but the prices appear stronger due to purchases by state-run banks," said one debt trader.
The government started a debt buyback program on Monday, when daily newspaper Clarin said it spent $150 million.
The S&P ratings downgrade did not come as a surprise to the market, though it underlined concerns about the health of Latin America's No. 3 economy and its financing outlook.
The Economy Ministry says the country's economy remains solid, and Argentina has budget and trade surpluses after five years of robust growth.
However, it faces rising debt obligations in 2009 and prices for its top export earner, soy, have slumped recently.
"There are sufficient motives to doubt Argentina's payment capacity," said Jose Espert, chief economist at consulting firm Espert y Asociados, citing the commodities sell-off.
Such sentiment prompted sovereign debt selling last week, forcing the center-left administration to step into the market to staunch the price descent.
The gloom also hit Argentine stocks, which deepened the previous session's losses on Tuesday.
The benchmark MerVal stock index .MERV ended down 0.72 percent at 1,696.60 points -- their lowest level since October 2006 -- with trade volume on the broad market of a light $23.7 million.
Among active shares, 18 advanced, 50 slipped and 18 ended unchanged.
On the foreign exchange market, the Argentine peso currency closed slightly weaker in light, cautious trade that was closely tracked by the central bank.
In formal interbank trade, where the central bank regularly intervenes to stabilize the local currency, the peso depreciated by just 0.08 percent to end at 3.035/3.0375 per dollar ARS=RASL.
In informal trade between foreign exchange houses, as measured by Reuters, the peso weakened by 0.24 percent to end at 3.075/3.0775 per dollar ARSB=. (Additional reporting by Walter Bianchi; Writing by Helen Popper; editing by Gary Crosse)