(Updates with closing stock prices, adds quote, funds returning to market on Monday)
BUENOS AIRES, Oct 24 (Reuters) - Argentina's peso currency dropped to its weakest level in six years against the dollar on Friday, stocks sagged to a 4-1/2-year low and bonds slumped so low that they priced in default expectations after a relentless week of bad sentiment on local markets.
Fears of a global recession, as well as a crisis in confidence over the Argentine government's economic policies, hammered the country's markets all week after the government announced a state takeover of the private pension system.
"What happened with government debt in the last week reinforces the idea that the market is pricing in a default," consulting firm Delphos Investment said in a report issued in Buenos Aires.
The peso weakened 0.77 percent in formal interbank trade to 3.2775/3.2800 per dollar ARS=RASL, its lowest level since the January 2002 devaluation.
In informal trade between foreign exchange houses, as measured by Reuters ARSB=, the currency sank 2.38 percent to 3.4250/3.4350 per dollar, the lowest since December 2002.
The MerVal index of leading stocks .MERV closed down 7.61 percent at 890.27 points, its lowest since mid-2004, and down almost 27 percent during the week. Volume was heavy at $38 million. Of 64 active issues, not one advanced.
Molinos food company launched a repurchase offer for 20.7 percent of its market capital, offering to buy 51.8 million shares at 9 pesos per share (MOL.BA) after the Argentine securities regulator relaxed restrictions on companies buying back shares.
Molinos was trading at 7.7 pesos per share.
A judge lifted a four-day ban on securities trading by private pension funds that had been imposed during an investigation of illegal trades and said they can return to action on Monday. The pension funds are the biggest institutional investors in Argentina.
Sovereign bonds traded over the counter in Buenos Aires closed down an average 2.4 percent, their eighth consecutive session of losses.
Argentine bond prices fell 27 percent on average this week, devastated by negative sentiment over the pension takeover, which markets viewed as a sign of government desperation over debt financing for next year.
While a pension takeover might help the government meet debt obligations next year, its surprise announcement eroded confidence in institutions and the rule of law in Argentina.
Some bond prices were quoted extremely low. The peso-denominated "par" bond ARPARP=RASL sank 7.7 percent to bid and ask prices lower than 15.
"There are bonds on sale," said one trader, summing up the week's huge slide. (Reporting by Jorge Otaola and Walter Bianchi; Writing by Fiona Ortiz; Editing by Dan Grebler)