UPDATE 6-Argentine peso in free-fall despite central bank rate hike to 60 pct

* Graphic on Argentina's economic crisis:

* Central bank cites peso slide, inflation in hiking rates

* Central banks sells $330 mln, leaving $54.3 bln in reserves (Updates peso level, adds economic context)

BUENOS AIRES, Aug 30 (Reuters) - Argentina's peso lost as much as nearly one-fifth of its value on Thursday despite the central bank's hiking its benchmark interest rate to a dizzying 60 percent as investors panicked over President Mauricio Macri's handling of an economic crisis.

Onerous borrowing costs combined with government spending cuts and a drought that crippled the agricultural sector this year have slammed Latin America's third-largest economy. It is expected to enter recession in the third quarter.

In an effort to stem a slide in the peso, the world's worst-performing currency this year, and to curb inflation running at 31 percent, the central bank's monetary policy committee at an emergency meeting on Thursday voted unanimously to raise its benchmark rate to 60 percent from 45 percent.

The bank, in a statement, cited "the foreign exchange rate situation and the risk of greater inflation" as the reasons for the hike.

The surprise move, however, failed to stabilize the peso. It finished down 13.12 percent at a record closing low of 39.25 pesos per U.S. dollar, after touching 42 pesos earlier in the day.

The market turmoil erupted early on Wednesday after Macri said he had reached a deal with the International Monetary Fund to accelerate disbursement of a $50 billion loan program agreed in June, in a misguided attempt to calm investor nerves.

Instead, Macri's admission that there was a "lack of confidence in the markets" about Argentina's ability to finance its deficit next year sowed panic among some investors. The country has $24.9 billion in peso- and foreign currency-denominated debt payments next year.

The IMF said hours later that it was considering speeding up payments because of the financial meltdown, but that Argentina needed to adopt stronger fiscal and monetary policies.

The central bank auctioned $330 million on Thursday, bringing this week's interventions to more than $1 billion. In efforts to prop up the currency the bank has sold more than $13.5 billion this year, leaving it with $54.3 billion in foreign currency reserves.

Despite the deal with the IMF, which had calmed financial markets briefly after it was announced in June, Macri has struggled to convince investors he can restore economic growth while cutting Argentina's budget deficit, reducing inflation and making the $640 billion economy more competitive.

Elected in 2015 on a pledge to end Argentina's repeated cycles of crises, Macri said his orthodox policies would set the stage for sustainable growth. But the private investment he counted on never materialized while cuts to public utility subsidies jacked up water and gas bills, fueling inflation.

"It looks likely that the economy is heading for a hard landing recession over the next 12 months," said Paul Greer, a portfolio manager at the Fidelity Emerging Market Debt Fund.

MORE FISCAL TIGHTENING

With Argentina's center-left opposition weakened by a series of corruption scandals, Macri was until recently expected to easily win reelection late next year, despite the struggling economy.

However, a rise in poverty levels due to soaring inflation and anger at job cuts under his economic reform is galvanizing the opposition.

The country's biggest labor group, the CGT, and other unions have called for general strikes in late September to protest Macri's belt-tightening measures.

Despite the growing social pressures, Macri's Cabinet chief, Marcos Pena, told reporters on Thursday that the government would "find ways to hasten the fiscal tightening process."

Argentina has already agreed with the IMF to cut its fiscal deficit from 3.7 percent of gross domestic product last year to 2.7 percent in 2018 and 1.3 percent in 2019.

(Reporting by Hugh Bronstein and Jorge Otaola; Additional reporting by Maximilian Heath and Scott Squires in Buenos Aires and Claire Milhench in London; Editing by Jeffrey Benkoe and Leslie Adler)