Argentine leader faces new political landscape

BUENOS AIRES (Reuters) - Argentine President Cristina Fernandez faced a new political landscape on Monday after losing control of Congress in a mid-term election as voters rejected her combative style and economic policies.

Former President Nestor Kirchner, who is Fernandez's powerful husband and predecessor, was defeated by a millionaire businessman from a rival faction within the ruling Peronist party in a high-profile congressional race.

Kirchner was set to resign on Monday as head of the party, local media said, but there was no immediate confirmation of the reports by Todo Noticias, America and C5N television stations.

The electoral losses could lead to political gridlock and a power struggle in the Peronist party as rivals jostle for positions ahead of a 2011 presidential election.

Argentine stocks, bonds and the peso currency all rallied on the election result as investors bet the Kirchners would be forced to relax interventionist economic policies that are unpopular with markets. [nN29383705]

"We think that this change in political landscape will translate into a much more pragmatic approach for the conduct of economic policy," Bulltick Capital Markets said in a report on Monday.

A government source, who asked not to be named, said Fernandez could replace several ministers in the wake of the humiliating defeat.

The election was widely seen as a referendum on the Kirchners. The former president had hoped to shore flagging support for his wife, whose popularity rankings have languished at about 30 percent for most of her 18 months in office.

Kirchner had been widely believed to be planning to run again for president in 2011, but he now cannot use a victory in Buenos Aires province as a springboard.

"The presidential race for 2011 will now dominate the local political scene and there is a risk of seeing earlier presidential elections next year," said Alberto Ramos, senior economist at Goldman Sachs, in a report.

Several political leaders, all of them Fernandez critics, were seen as being strengthened by Sunday's vote as either they or congressional candidates allied with them fared well.

They include Vice President Julio Cobos, who has broken ranks with the Kirchners, Buenos Aires Mayor Mauricio Macri and Senator Carlos Reutemann, a Peronist.

A SHARP BLOW

In the most closely watched race on Sunday, a slate of candidates headed by businessman Francisco de Narvaez took 2.5 percentage points more votes than the slate headed by Kirchner in Argentina's most populous province, Buenos Aires.

According to near-complete official results, De Narvaez's slate won 34.6 percent of the vote compared to Kirchner's list's 32.1 percent.

However, that was seen as a sharp blow for the presidential couple because the province has been their support base since Kirchner was elected in 2003.

In the lower house, opposition parties took more than a dozen seats, rolling back Fernandez's previous majority when her allies had more than half of the chamber.

The president also lost her majority in the Senate, although her allies could theoretically retain control by forging alliances.

The new Congress will not be seated until December. That will give Fernandez five months with a majority in both houses, which some economists and political analysts say she could use to increase state control over the economy rather than to move in a pragmatic direction.

Argentines complain about high inflation and rising crime, and many voters turned against the Kirchners due to their handling of a messy conflict with farmers over taxes on the nation's multibillion-dollar grains exports [nN29330428].

(Additional reporting by Fiona Ortiz and Kevin Gray; Editing by Will Dunham and Frances Kerry)