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(Adds peso closing level, analyst quote)
BUENOS AIRES, March 26 (Reuters) - Argentina's peso currency weakened 1.34 percent to an all-time low close of 42.65 per dollar on Tuesday, as concerns about high inflation and political uncertainty ahead of the October presidential election dented confidence in the economy.
The markets rejoiced in late 2015 when center-right Buenos Aires Mayor Mauricio Macri was elected leader of Argentina on promises that his orthodox policies would attract waves of foreign direct investment after eight years of free-spending populism under outgoing President Cristina Fernandez.
Latin America's No. 3 economy has soured over the last year, however, with benchmark interest rates in excess of 66 percent and inflation galloping at more than a 50 percent annual rate.
Fernandez, still popular among millions of the country's low-income voters, may challenge Macri in October. His popularity has been gouged by Argentina's shrinking economy and the higher public utility bills that followed after Macri reduced electricity, water and heating gas subsidies.
"Markets are really nervous about the October presidential election, so every time there's a poll with negative numbers for Macri, you will see a negative reaction on the peso," Carlos de Sousa, a senior economist at Oxford Economics, said to Reuters.
He added, however, that despite Tuesday's record low, he had an optimistic view on the peso over the next six months.
"We think the central bank's ultra-hawkish stance will provide sufficient support to avoid another currency crisis even if the political outlook remains highly uncertain," De Sousa said.
Macri was forced by the weakening peso to negotiate a $56.3 billion standby financing deal with the International Monetary Fund last year. The agreement requires his government to erase its primary fiscal deficit. His politically painful utility subsidy cuts are part of that fiscal effort.
The peso's weakness on Tuesday was also influenced by trouble in the markets of other developing countries.
"The peso continues to suffer amid the broader emerging markets pain. The volatility in the Turkish Lira in particular over the past few days has reminded investors about Argentine vulnerabilities," said Ilya Gofshteyn, an analyst with Standard Chartered Bank.
"Argentina has the benefit on an IMF package and a credible adjustment plan in place, so this latest weakness in the currency may prove transitory," Gofshteyn said in an interview. (Reporting by Jorge Otaola; additional reporting by Cassandra Garrison; writing by Hugh Bronstein; editing by Marguerita Choy and Richard Chang)