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UPDATE 3-Wall Street traders pump up Argentine peso as currency controls bite

Cassandra Garrison and Marc Jones

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BUENOS AIRES/LONDON, Sept 3 (Reuters) - Argentina's peso surged on Tuesday morning, pumped up by Wall Street traders back after a long holiday weekend cheering President Mauricio Macri's capital controls aimed at protecting the beleaguered currency.

The peso was 5.36% stronger at 56 per U.S. dollar, traders said, after it eked out a small gain on Monday. Argentina country risk also fell after soaring last week to levels not seen since 2015.

The peso rise gives some relief to Macri, after a shock primary election battering last month sparked a sharp crash in the country's bonds, equities and the peso, which lost around 26% of its value against the greenback in August alone.

In Europe, the pounding of Argentina's bonds also eased after they had fallen to record lows on Monday, while there were tentative gains in some foreign-traded bank shares.

Frankfurt-listed American Depositary Receipts (ADR) of Grupo Financiero Galicia were up almost 1%, having tumbled 9.15% on Monday, but Banco Macro SA's ADRs slipped again. Brokers were quoting marginally higher prices for Argentina's badly mauled sovereign debt in Europe.

The black market peso, which had fallen on Monday, rose on Tuesday, although not as sharply as the official spot rate.

Macri's pivot to currency controls, which he abolished when he came into power in 2015 touting his free-market credentials, could though hurt the country's "emerging market" status with index provider MSCI.

MSCI said late on Monday the move to restrict the movement of capital could cause "material deterioration of an equity market's accessibility," and could lead to the "reclassification of the MSCI Argentina Index to Standalone Market status."

However, since only foreign-listed shares are part of the index "MSCI believes that the MSCI Argentina Indexes remain replicable, despite the introduction of capital controls."

Any reclassification of Argentina in the widely followed indexes would first require a public consultation from MSCI.

On Sunday, the government authorized the central bank to restrict purchases of dollars as it burns through its reserves to prop up the peso. The currency controls were a 180-degree turn for President Macri, a free-markets advocate who abolished capital controls after he came to power in 2015.

It was the government's latest attempt to stabilize the peso, which has lost 28% of its value since opposition presidential candidate Alberto Fernandez emerged as the clear front-runner in the Aug. 11 primary election.

Fernandez and his running mate, former President Cristina Fernandez de Kirchner, are considered a riskier prospect by investors, who fear Argentina could return to the interventionist policies of her former government.

On Monday, central bank president Guido Sandleris called Argentina's financial system "strong" and said the bank would adhere to its strict monetary policy, despite the currency restrictions.

Sandleris, speaking at a press conference, said the bank was in talks with the IMF to "redefine" the monetary goals for September under its $57 billion financing agreement.

(Reporting by Marc Jones in London; Cassandra Garrison and Jorge Otaola in Buenos Aires; Rodrigo Campos in New York)