(Recasts with government statement)
BUENOS AIRES, Argentina, Sept 9 (Reuters) - Argentina defaulted on a $3 billion debt to the International Monetary Fund (News - Websites) on Tuesday, the biggest single missed payment in the IMF's history and likely to further isolate the precarious economy.
The default, which comes nearly two years after Argentina racked up the biggest sovereign debt default ever in the throes of economic collapse, means Latin America's No.3 economy joins the ignominious ranks of IMF defaulters like Liberia, Sudan and Zimbabwe.
"To avoid compromising 25 percent of (Central Bank) reserves, the government has decided to suspend the payment that was due today," the Cabinet Chief's office said in a statement.
"The Argentine government and the IMF have not yet concluded negotiations concerning a refinancing deal with the multilateral credit organizations (the IMF, World Bank (News - Websites) and Inter-American Development Bank)," it added.
The IMF was not immediately available for official comment on the default, which comes as Argentina was striving to reach a crucial aid deal with the IMF to roll over $12.5 billion owed over the next three years.
However, many economists expect some kind of deal to be forged in coming days or weeks, and played down the default's importance in the near-term. It could take at least a month before the IMF institutes any sanctions and penalties.
The economy has shown tentative signs of recovery in recent months under the stewardship of highly popular new President Nestor Kirchner.
NEW NAIL IN COFFIN
But the default is another nail in the coffin for investor confidence in Argentina, still a pariah for many investors after the government stopped making payments in January 2002 on what is now $90 billion in defaulted, privately-held debt.
Kirchner's new left-leaning government opposes IMF austerity plans and refused to use around a quarter of its international reserves to pay Tuesday's debt.
Thousands of unemployed protesters, including mothers pushing strollers and men waving placards such as "No to the IMF, Yes to education and bread!", paraded in downtown Buenos Aires, where people often label the IMF the "International Misery Fund."
Kirchner, part of a growing number of Latin American leaders reluctant to follow Washington-encouraged pro-market reforms, argues that he must place priority on helping around half the country of 36 million people that live in poverty.
"This is not a happy state of affairs, but the market has learned to live with it (Argentina's default on privately held debt)," said Gerd Haeusler, director of the IMF's capital markets department, at a Paris meeting.
While Argentina was a darling of Wall Street in the 1990s after a bonanza of market reforms, now it is almost impossible for consumers to get a simple bank loan. Firms must rely on their own cash rather than credits to expand.
"The day-to-day will not change, but a default is serious because it means that Argentina is refusing to deal with major economic issues that surged from last year's collapse and could eventually undermine the recovery," said Sebastian Rodrigo, a lawyer who advises local and foreign investors in Argentina.
Argentina, which is not asking for any fresh cash, has so far failed to agree with the fund over conditions for a wider aid deal, including compensating banks for losses after last year's currency devaluation and raising frozen utility rates.
Argentina must resolve its debt obligations with the IMF before it can get down to restructuring the $90 billion worth of defaulted debt held by hundreds of thousands of creditors from Milan to Tokyo.
(Additional reporting by Alistair Scrutton and Brian Winter in Buenos Aires, Anna Willard and Lesley Wroughton in Washington, Hugh Bronstein in New York, and Paul Carrel in Paris)