Fernandez scraps decree to pay debt with reserves

* Does not say whether will revive the plan
* Signs decree to use reserves to pay multilateral bodies
* Central bank starts transfer of funds to Treasury (Recasts with analyst quote, central bank source)

BUENOS AIRES, March 1 (Reuters) - Argentine President Cristina Fernandez on Monday scrapped a decree to tap $6.6 billion in foreign reserves to help honor public debt this year, but ordered the use of reserves to pay multilateral lenders.

In her state of the union address to Congress, Fernandez said she had signed a new decree allowing the use of about $4 billion of central bank reserves to pay lenders such as the World Bank and the Inter-American Development Bank.

A government source said the monetary authority had started transferring the funds to the Treasury, while opposition parties said they would ask the courts to freeze the new decree. For more see [ID:nN01102374].

Fernandez's initial bid to transfer part of the country's $48 billion in foreign reserves into a fund had been blocked by the country's courts and opposed by the former central bank chief Martin Redrado, who the president then fired.

The bank is now controlled by a close government ally.

The government was also expected to tap the reserves to pay some $2 billion of debt with multilateral institutions coming due this year.

Fernandez did not say whether she would submit a bill to lawmakers to try to revive her initial bid to create a fund to pay private creditors this year.

Argentine newspaper La Nacion said on Sunday Fernandez's government would try to revive the stymied plan by changing tactics and pushing a law through the opposition-controlled Congress.

Wall Street analysts say Fernandez will likely seek alternative ways to tap Argentina's foreign reserves to boost government spending ahead of next year's presidential elections.

We suspect this issue is not over yet, RBS Securities analyst Boris Segura said in a research note. Authorities are still likely to go after the international reserves, as a way to finance their fiscal largesse in the run up to 'the mother of all electoral battles' in 2011.

Fernandez had sought to save the decree by getting the Senate to endorse it, but failed to secure enough support from senators, forcing a change of strategy, La Nacion said.

Congress was in recess in January and February and renewed sessions on Monday.

If Fernandez presents a bill, her cash-strapped government, which faces a financing gap estimated at up to $7 billion this year, could be forced to make significant concessions on the reserves plan to win support from lawmakers.

The political and legal wrangle sparked by Fernandez's reserves plan highlighted persistent uncertainties in Latin America's No. 3 economy just as it seeks to win over investors with a planned swap of $20 billion in defaulted bonds. (Reporting by Kevin Gray, Jorge Otaola and Walter Bianchi; Writing by Walter Brandimarte; Editing by James Dalgleish)