Argentine President Cristina Fernandez on Thursday fired the country's central bank president, who had rejected her calls to step down for refusing to use Argentina's foreign currency reserves to pay debt.

Fernandez issued a presidential decree removing Martin Redrado from office, citing misconduct and dereliction of duties. He was replaced by Central Bank Vice President Miguel Pesce, a government ally, who will serve as interim president.

The conflict has highlighted uncertainty in Argentina as Latin America's number 3 economy tries to win back investor confidence and return to global markets with a bond issue eight years after a massive debt default.

It also threatens to open a protracted legal battle led by an emboldened opposition that has backed Redrado and is looking to challenge Fernandez after she lost control of Congress in mid-term elections last year.

Redrado will step down to respect the decree and plans to present a court injunction against his firing, a central bank official told reporters.

The former central bank head did not comment publicly about his ouster as constitutional experts questioned the legality of Fernandez's decision.

His firing came after Argentine stock, bond and currency markets closed, but the spread on Argentine bonds over comparable US Treasuries widened 25 basis to a nearly three-week high of 681, according to the J.P. Morgan Emerging Market Bond Index.

The deadlock between the government and Redrado has heightened political tensions and cast a shadow over the government's attempts to reshape its image among investors.

The Argentine leader on Wednesday asked Redrado to resign after he failed to act on her order to use $6.6bn in foreign currency reserves to meet debt payments next year.

Economy Minister Amado Boudou, in comments to Radio 10, said the government would hold talks with Mario Blejer, who headed the central bank in 2002 and is a former International Monetary Fund official, about taking over permanently as the bank's chief.

Debt repayment fund
Under the central bank's charter, the executive branch can dismiss a member of the bank's board but must have a recommendation from a special congressional committee.

The presidential decree, however, stated that Congress is in recess and its recommendation is nonbinding.

Some Argentine legal analysts said the dispute may be headed for more legal wrangling.

Constitutional lawyer Gregorio Badeni questioned the legality of Redrado's dismissal. “It is indispensable to have the opinion (of a congressional commission), although opinion wouldn't be binding,” he told local television.

Redrado angered Fernandez when he refused for three weeks to move on her presidential decree creating a debt repayment fund called the Bicentennial Fund aimed at guaranteeing the country's 2010 debt payments.

Argentina's debt obligations rise steeply this year to $13bn, and economists estimate a funding gap of $2bn to $7bn.

The fund's announcement last month helped add to a recent rally in Argentine bonds and drive down the costs of issuing new debt. Fernandez is hoping to tap global credit markets paying a single-digit interest rate.

But opposition leaders criticized the plan and some filed lawsuits seeking to block the use of reserves to pay off debt, saying it threatens the central bank's autonomy and could lead to a sharp increase in government spending.

Redrado questioned Fernandez's decision, worried the fund could be targeted by international creditors who have filed lawsuits stemming from the country's default.

Boudou has pledged to continue with a $20bn debt swap, planned for later this month, that aims to mop up leftover defaulted bonds and clear the way for Argentina to issue a major bond.

A crisis over foreign reserves – which total about $48bn – could raise Argentina's borrowing costs just as it tries to return to markets. Signs the debt fund will move forward could give a boost to bond prices.

Pesce, the new central bank president, belongs to a wing of the opposition Radical party allied with Fernandez and her husband and predecessor former President Nestor Kirchner.

“He's a 100 percent loyal aide to the Kirchners,” Claudio Loser, an Argentine economist and ex-IMF official told local television.

In comments to the state-run Telam agency, Pesce signaled he would move ahead with the debt repayment fund.

“The only thing left to do is to implement (the decree)”, he said.