UPDATE 2-Argentina central bank bleeds reserves to defend peso ahead of election

Hugh Bronstein and Walter Bianchi

election@ (Recasts, adds analyst quotes, add market background)

BUENOS AIRES, Oct 25 (Reuters) - Argentina's central bank kept selling dollars in defense of the beleaguered peso on Friday, with concerns rising about the bank's falling reserves ahead of a Sunday presidential election dreaded by the financial markets.

The bank sold $72 million in the first of an expected four interventions on Friday, traders said, as the peso continued its four-year swoon under President Mauricio Macri, a free-markets advocate expected to lose his re-election bid in Sunday's vote.

The bank has shed $21 billion in reserves since the August primary election, when Macri got thumped by his Peronist challenger Alberto Fernandez. Reserves were at $45.26 billion on Friday as markets worried about a resurgence of government intervention in the economy under a Fernandez government.

"My sense is that he will announce more strict capital controls from day one, because the reserve level is very low," said Alberto Bernal, chief emerging markets strategist at XP Investments in New York.

With the election increasing jitters about the recession- and inflation-racked economy, the peso was down 0.3% at 59.96 to the dollar after weakening 1.3% on Thursday, even after the central bank sold $346 million in reserves to ease its fall.

A default scare last year forced his administration to sign a $57 billion loan deal with the International Monetary Fund, which has said it will evaluate its relationship with Argentina once it has clarity on debt sustainability in light of the next government's policies.

Fernandez's alliance with former president and populist icon Cristina Fernandez de Kirchner has meanwhile unnerved investors. Fernandez de Kirchner is running as Alberto Fernandez's vice presidential candidate.

"Alberto needs to make sure that Cristina stops talking about economic policy, because every time she speaks, the market and savers freak out. Fernandez will have very little time to deliver a coherent plan that the markets and the IMF can endorse," Bernal said.

Macri was elected on promises of "normalizing" an economy distorted by heavy-handed market interventions. But he overestimated his ability to attract investment and underestimated the inflationary impact of his fiscal policies.

These included cuts in public utility subsidies that boosted electricity and heating bills for businesses, which in turn hiked prices for the goods and services they sold. Inflation took off and has yet to moderate. Consumer prices rose 5.9% in September alone.

The peso has shed 84% of its value since Macri's inauguration in December 2015. (Reporting by Walter Bianchi and Hugh Bronstein, additional reportin gby Jorge Otaola and Hernan Nessi; editing by Hugh Lawson and Marguerita Choy)