BUENOS AIRES, Argentina, Oct 22 (Reuters) - Argentina's provinces failed to reach an accord on Monday over government proposals to cut fund transfers in what would be a crucial accord if President Fernando de la Rua is to keep to promises to end budget deficits.

Under the deal being discussed, in return for the central government cutting transfers to provinces, the state would help renegotiate provincial debt with local banks -- around $10 billion in loans carrying interest rates of up to 30 percent.

Provincial governors, powerful players in the federal system and mostly members of the opposition Peronist party, failed to reach an agreement after some governors did not turn up for discussions. Another meeting will be held on Tuesday.

"We brought a proposal," Jorge Sobisch, pro-Peronist governor of the Neuquen province, as he left the meeting, adding that some provincial governors did not turn up.

A deal would be a political godsend for embattled De la Rua, whose center-left coalition was trammeled in midterm elections Oct. 14 and who has spent the first two years of his presidency trying to stave off financial crisis by cutting government spending.

The agreement would pave the way for a cabinet shake-up and for Economy Minister Domingo Cavallo to announce new economic measures to cut state spending and boost consumer spending -- the main engine to Latin America's third largest economy.

A multibillion dollar local debt exchange, in which pension funds and local banks would swap high-yielding debt for lower yielding or longer term bonds, is also expected to be announced.

Since midterm elections made the opposition Peronists the biggest party in both houses of Congress, investors have been clamoring for new measures to show that De la Rua is in control of the weakened coalition government.

Foreign investors say Argentina has flirted with default on its $132 billion public debt as the government found it increasingly difficult to meet obligations, relying on $22 billion in bailouts from the International Monetary Fund.

Desperate to comply with the "zero deficit" policy and convince investors Argentina was solvent, Cavallo made cuts in $1.364 billion a month of tax revenue the government pays provinces. The funds account for the lion's share of provincial revenues.

The new deal is expected to see the central government pay what its owes to the country's 23 provinces and federal capital -- $500 million at the end of September -- with Lecops, a federally backed bonds called Lecops.

Foreign Markets had reacted positively to the news. The 2008 global bond rose 0.433 percent to to 58.50.

"It seems the negotiations with the (federal) government and provincial governors are coming through and investors are taking that positively," said David Sekiguchi, emerging market strategist at Deutsche Bank.

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