UPDATE 4-Wall Street traders pump up Argentine peso as currency controls kick in

Cassandra Garrison and Jorge Otaola

in@ (Updates with central bank intervention, analyst quote on market fall)

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

The peso was 5.36% stronger at 56 per U.S. dollar, traders said. Argentina country risk also fell after soaring last week to levels not seen since 2015.

Traders said the central bank intervened in the afternoon by selling dollars from its reserves, but the bank declined to comment. The bank has heavily intervened in the past, selling nearly a billion dollars in the second half of last week alone.

Argentina's S&P Merval stock index took a hit in afternoon trading, dropping more than 10% in a dip that local analysts attributed to global trade jitters.

"All the markets are in the red and a weakened country like Argentina, with a complicated political situation, gets hits even more," said Hector Scasserra, director of local brokerage firm Arpenta Sociedad de Bolsa.

The currency rebound 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. It has diverged from the official spot rate by the largest margin since 2015.

Index provider MSCI said it was closely monitoring developments in Argentina but said the country's "emerging market" status for the purpose of MSCI indexes remained valid for now as MSCI Argentina only held foreign-listed shares.

Argentina was included in the emerging markets index in May, potentially boosting inflows to the eight stocks that were added.

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 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 news conference, said the bank was in talks with the International Monetary Fund to "redefine" the monetary goals for September under its $57 billion financing agreement.

(Reporting by Marc Jones in London; Cassandra Garrison, Eliana Raszewski and Jorge Otaola in Buenos Aires; Rodrigo Campos in New York; Editing by Rosalba O'Brien)