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uncertainty lies ahead@ (Adds closing bond prices, analyst comment, adds graphic)
BUENOS AIRES/NEW YORK, Sept 6 (Reuters) - Argentine markets ended the week on a high after capital controls helped arrest a sharp plunge in the peso currency and local bond prices, but investors said the outlook remained shaky amid swirling political and financial uncertainty.
The peso edged higher and finished the week with a 6.6% gain. It had lost around a quarter of its value in August after a surprise landslide win by populist-leaning presidential challenger Alberto Fernandez in the Aug. 11 primary election.
The country's over-the-counter (OTC) bonds rose an average 2.9%, up 10.7% for the week. But debt prices remained deeply discounted, having tumbled 39% in August when the shock primary result signaled that business-friendly incumbent Mauricio Macri would not win a second term in the Oct. 27 general election.
Investors and analysts said markets were bracing themselves for more wild swings in Argentine assets as Macri, hobbled by his primary election defeat, tries to keep the country out of default.
"I think it's very unlikely that we've seen the end of the volatility," said Alejo Czerwonko, emerging markets strategist at UBS Global Wealth Management.
He said the government and opposition needed to work together with creditors to restore calm given Macri's weakened state.
"The individual with the ability to implement policy doesn't have the credibility to implement it because most folks out there believe he won't be in power in three months time."
Macri, a free-market champion who came to power in 2015, is expected to lose the general election to Fernandez, whose running mate, populist ex-leader Cristina Fernandez de Kirchner, is frowned upon by global investors and big business.
"The perception that President Macri will soon be replaced is now a key obstacle to any lasting deal between Argentina and its creditors," Capital Economics said in a note on Friday.
"This period of uncertainty could last until Dec. 10, when the next president will take office."
So far, investors have cheered Macri's moves to stem the currency rout. Some said asset prices already reflected uncertainties ahead.
"Current pricing already includes a fair amount of the risks involved," said Alberto Bernal, chief emerging markets strategist at XP Investments in New York.
Fernandez has also tried to ease fears by having his economic adviser, Guillermo Nielsen, hold calls with foreign creditors over the past week, investors said. Nielsen was the country's chief debt negotiator following a default in 2002.
Fernandez nonetheless struck a populist note during a trip to Madrid on Thursday, which has some foreign investors nervous.
After the primary vote, Argentina's over-the-counter sovereign bonds fell an average 39.4% in August before bargain hunters stepped in this week, helping drive prices higher. The Merval stock index also climbed on Friday, taking it up almost 13% for the week.
Last year, Macri agreed a $57 billion credit line with the International Monetary Fund (IMF). Now he has been forced to roll out plans to delay payments on around $100 billion of debt, evoking memories of Argentina's 2002 default.
While markets have stabilized, the economic outlook has dimmed. Economists polled by the central bank raised their inflation forecast for the year to 55% and cut their outlook for the economy, expecting it to shrink 2.5%.
"The impact of the measures on the markets is favorable, but merely transitory," said Gabriel Monzón, an economist and technical director at regional body the Parliamentary Confederation of the Americas (COPA).
"All exchange control measures are aimed at maintaining a fictitious calm until December (when the new government takes over), something that will be very difficult to achieve."
(Reporting by Jorge Otaola and Hugh Bronstein in Buenos Aires and Rodrigo Campos in New York; Writing by Adam Jourdan Editing by Chizu Nomiyama, Marguerita Choy, David Gregorio and Jonathan Oatis)