(Recasts lead to add replacement considered sympathetic to interventionist stance; adds market reaction, analyst quotes, context)
By Jorge Otaola and Nicolás Misculin
BUENOS AIRES, Oct 1 (Reuters) - Argentina's central bank chief resigned on Wednesday after a long tussle with the Economy Ministry and was replaced with a regulator considered sympathetic to the interventionist stance of a government battling one of the world's highest inflation rates.
The move drew a sharp negative reaction in financial markets, with the price of Argentina's local U.S. dollar-denominated bonds skidding.
The resignation of Juan Carlos Fabrega as head of the central bank followed a long tussle with the Economy Ministry over whether policymaking should focus on taming inflation or bolstering growth in Argentina's stagnating economy. The government has also been grappling with shrinking foreign reserves after another debt default in July.
Alejandro Vanoli, head of the country's markets regulator, will take over as the central bank chief, a spokesman for President Cristina Fernandez said.
Fernandez has scaled up state interventions in Latin America's No. 3 economy since the July default, battering investor confidence and intensifying capital flight.
"Fabrega handed in his resignation this afternoon in a way that was impossible to decline," a source at the central bank told Reuters.
Argentina's local U.S. dollar-denominated bonds shed around two points on the news, with the Bonar 2017s sliding from around 88.40 to 86.75 and the Boden 2015s dropping from 91.75 to 90.0, according to brokers.
Equities plunged, with the Merval index closing down 8.2 percent.
Policymaking, aimed at reining in an inflation rate that private economists estimate could be as high as 40 percent, had become increasingly erratic as the bank got sucked into a tug-of-war with the pro-growth economy minister, Axel Kicillof.
"Fabrega has been seen as the more orthodox side of the administration, and his departure will be negatively perceived by the market," said Alejo Costa, chief strategist at local investment bank Puente.
"Not a good sign," echoed Goldman Sachs analyst Alberto Ramos. "Fabrega was perceived to be a moderating voice and someone that really understood financial market dynamics."
Vanoli takes over the helm of the cash-strapped central bank with foreign reserves standing at $27.9 billion - or roughly four-and-a-half months import cover, while the peso has fallen through a series of record lows since the July default.
Vanoli is viewed by some analysts as more interventionist than Fabrega and more in line with the policies of Kicillof, a Fernandez favorite.
Argentina last month enacted legislation to localize payments on debt held under international law. The law was aimed at skirting the U.S. court rulings that set the stage for the Argentina's latest default.
This week a U.S. judge in Manhattan called the measure illegal and held Argentina in contempt.
The government has also tightened trade controls, further restricted the amount of dollars available to importers and signed a law empowering the government to determine production and price levels of large firms in response to the deteriorating economic outlook. [ID:nL2N0RW0QB}
"Fabrega's resignation clearly signals that Kicillof has gained full control of economic policy," said Ignacio Labaqui, who covers Argentina for New York-based emerging markets consultancy Medley Global.
Ernesto Ambrosetti, chief of the powerful Argentine Rural Society, which represents some of the biggest farms in the grains powerhouse, said Vanoli's appointment "means more uncertainty."
"We assume they appointed Vanoli because he will do less to slow down the policies of the economy minister, and that will not be good for Argentina." (Additional reporting by Sarah Marsh and Hugh Bronstein in Buenos Aires, and Davide Scigliuzzo of Thomson Reuters IFR in New York; writing by Richard Lough; editing by Dan Grebler, Andre Grenon and Leslie Adler)