(Updates with close, adds peso, bonds)
BUENOS AIRES, July 21 (Reuters) - Argentine stocks .MERV surged 3.9 percent on Monday, led by power companies that rallied on media reports of possible rate hikes for natural gas and electricity, while bonds were also firmer.
The MerVal .MERV benchmark stock index closed at 1,981.76 points after clocking its second-biggest percentage gain of the year, trimming its losses in July to 5.98 percent.
"The bulk of the buying focused on electricity shares ... due to the strong signs that point to a tariff adjustment," said Horacio Corneille, the director of a brokerage that bear his name.
Gains were led by power transmission company Transener TRA.BA, which saw its stocks jump 15.3 percent to 1.13 pesos per share. Another major gainer was electricity distributor Edenor (EDN.BA), which rose 11.62 percent.
The center-left government of President Cristina Fernandez made no immediate comment on the media reports that it was considering a tariff increase.
Residential electricity and natural gas tariffs have been largely frozen since a sharp currency devaluation in 2002.
Trade volume on the MerVal was a moderate $47.5 million. Of active shares, 68 advanced, 26 fell and 10 were unchanged.
Meanwhile, Argentine bonds traded on the local market were firmer, gaining an average of 1.0 percent, but the cautious mood persisted even after the government revoked the grains export tax hike that caused a four-month farming conflict.
The dollar-denominated Par bond ARPARD=RASL, maturing in 2038, gained 2.0 percent while the dollar-denominated Boden bonds, which matures in 2014, rose 3.0 percent.
Argentine debt was battered by uncertainty over the farm dispute, but market analysts said traders were still closely watching the government's next move.
On the foreign exchange market, the peso remained steady against the dollar as the central bank mopped up dollars being sold by grains exporters, traders said.
In formal interbank trade, where the central bank regularly intervenes, the peso ARS=RASL ended steady at 3.0225/3.0250 per dollar.
In informal trade between foreign-exchange houses, as measured by Reuters, the peso gained 0.16 percent to 3.0725/3.075 per dollar ARSB=.
The dollar purchases will allow the central bank to replenish its foreign reserves. The bank sold $2.7 billion in reserves during the farm dispute to stop the peso weakening as savers rushed for safe-haven greenbacks.
Exporters resumed normal activity on Monday after the government revoked the tax hike. (Reporting by Walter Bianchi and Jorge Otaola; Writing by Helen Popper; Editing by Diane Craft)