The South American country's economy minister, Axel Kicillof, was expected to speak at the Argentine consulate office in New York after several hours of talks, according to a spokeswoman.
The holdout hedge funds want full repayment on bonds they bought on the cheap after the country last defaulted in 2002, a demand Argentina has so far rejected. Their attorneys, along with an Argentine delegation, met at the offices of court-appointed mediator Daniel Pollack in New York, with just hours to go until the deadline for an interest payment.
Argentina's bonds surged 14 percent to levels not seen in 3-1/2 years, its stock market hit a record, and the peso rallied, signals to some investors that a deal was attainable before another damaging default.
"It's trading like there's a deal," said a fund manager who holds Argentina's restructured debt and requested anonymity. "I don't have information, but someone knows there's a deal."
In the evening, Standard & Poor's downgraded the country's rating to default, but the bonds did not react.
Latin America's No. 3 economy has for years fought NML Capital, a unit of Elliott Management Corp, and Aurelius Capital Management, the leading U.S. hedge funds that rejected large writedowns. After exhausting legal avenues, it faces its second default in 12 years if it cannot reach a last-minute deal.
The Buenos Aires government has pushed hard for a stay of the U.S. court ruling that set Wednesday's deadline.
The country has until midnight Wednesday (0400 GMT on Thursday) to break the deadlock. If it fails, U.S. District Judge Thomas Griesa in New York will prevent Argentina from making the July 30 deadline - representing the end of a 30-day grace period - for a coupon payment on exchanged bonds.
As talks continued, U.S. ratings agency Standard & Poor's downgraded the country's long- and short-term foreign currency credit rating to "selective default," from triple-C-minus and C, respectively. S&P cited Argentina's failure to make a June 30 coupon payment on its discount bonds due in 2033, which it does not rate. The default rating will remain until Argentina makes a payment, the agency said.
"The making of the payment is not an automatic process - it takes time for that to happen," said Roberto Sifon-Arevalo, managing director at S&P.
A consortium of Argentine banks was set to offer to buy out the holdout investors' debt, in an 11th-hour deal aimed at averting a default, a senior banking executive familiar with the offer told Reuters on Wednesday.
The executive said there had not yet been any discussions with the U.S. hedge funds leading the litigation and that the offer would require them to take a haircut, or reduced payment for the bonds.
"The idea is to sit down with the funds and buy all their debt. We have to negotiate the final amount, the terms and how payment will be made," the executive told Reuters.
NML Capital said it had no comment on the banks' proposal.
BONDS JUMP
Argentina's key dollar bond due 2033 jumped on Wednesday, and its debt insurance costs fell as investors took some cheer from Tuesday's meeting.
The 2033 dollar discount bond US040114Gl81=R surged as much as 12 points from Tuesday's close to a bid price of 95.01, according to Thomson Reuters data. That dropped its yield to 8.89 percent, hitting levels not seen since November 2010. Argentina's MerVal (.MERV) index rose 6.9 percent to 8,937.62 on the day, and at one point touched a record high, while the Argentine peso ARSB= rose 3 percent in the parallel market where it trades.
At one point, the cost of the country's five-year credit default swaps, or insurance on the bonds, fell nearly 400 basis points from Tuesday's close to 1,505 basis points, according to Markit. The swaps had hit six-week highs on Tuesday.
Argentina's one-year credit default swaps dropped 51 basis points from Tuesday's close to 4,708 basis points.
After defaulting in 2002, Argentina restructured its debt in 2005 and 2010. More than 90 percent of the bondholders agreed to accept new bonds with reduced payments. The holdouts refused the terms.
Tough-talking President Cristina Fernandez has called the funds "vultures." Her refusal to flinch in public from her stance that they accept a writedown has split opinion among Argentines at home and abroad.
"We are divided as a family. I think the government needs to settle, and my husband thinks the government is doing the right thing," an Argentine mother of four, who gave her name as Adriana, said while on vacation in New York.
Francisco Sobrero, 69, a tourist visiting from Argentina, held up signs outside Pollack's offices in Spanish that translated to "vultures out of Argentina," and "do not take our pound of flesh."
"I want to show my support to the Argentine government" he said.
Economy chief Kicillof's unexpected arrival in New York raised hopes that there was still time to stave off a default that would bring more pain to an economy already in recession, though not the economic collapse seen in 2002 when Argentina defaulted on $100 billion in debt.
The country received a modicum of support on Tuesday when holders of its euro-denominated exchange bonds said a suspension would encourage a settlement.
They also said they would facilitate a deal by waiving the so-called rights upon future offers, or RUFO, clause that prevents Argentina from offering other investors better terms than it offered them.
Argentina has consistently argued the RUFO clause prohibits it from settling with the holdouts. However, the holdouts in a Wednesday court filing urged U.S. Judge Griesa to reject the exchange bondholders request that the stay be reinstated.
While unnerving, the debt crisis is a far cry from the turmoil of Argentina's record default in 2002 when dozens were killed in street protests and the authorities froze savers' accounts to halt a run on the banks.
"There is still no sign of contagion to markets elsewhere in the region," said David Rees, emerging markets economist at Capital Economics.
(Additional reporting by Alejandro Lifschitz and Sarah Marsh in Buenos Aires, Carolyn Cohn in London and Rodrigo Campos in New York; Editing by David Gaffen and Jonathan Oatis)
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