Argentina faced a race against on time on Wednesday to avert its second default in 12 years, needing either to cut a deal by the end of the day with "holdout" investors suing it or to win more time from a U.S. court to reach a settlement.

Argentine Economy Minister Axel Kicillof hurried to New York on Tuesday to join last-ditch negotiations, holding the first face-to-face talks with the principals of New York hedge funds who demand full repayment on bonds they bought at a discounted rate after the country defaulted in 2002.

Kicillof emerged from talks late on Tuesday, saying only that they would resume on Wednesday, but mediator Daniel Pollack said issues dividing the parties "remain unresolved" and that the two sides had not decided whether to meet on Wednesday.

Argentina has until the end of Wednesday to break the deadlock. If it fails, U.S. District Judge Thomas Griesa will prevent Argentina from making a July 30 deadline for a coupon payment on exchanged bonds.

Argentina's key dollar bond due 2033 rose sharply on Wednesday, and its debt insurance costs fell as investors took some cheer from the meeting.

Argentina's five-year credit default swaps dropped 30 basis points from Tuesday's close to 1,869 basis points, according to Markit. The CDS had hit six-week highs on Tuesday. The nation's one-year credit default swaps dropped 51 basis points from Tuesday's close to 4,708 basis points.

The CDS continue to price in a very high probability of default in the near term.

"Bonds have fallen in recent days but are far from pricing a default," said Emiliano Surballe, fixed income analyst at Bank Julius Baer.

"While nothing has been done yet to avoid a default, the chances of a last-minute transfer of funds to pay creditors leaves the door open for a boom (if Argentina pays) or bust (should there be a default)," Surballe said.

The hedge funds are owed $1.33 billion plus accrued interest, but an equal treatment clause in an agreement Argentina made with bondholders in 2005 would cost the nation many billions more.

FOCUS ON RUFO CLAUSE

Latin America's No. 3 economy has for years fought the hedge funds that rejected large writedowns, but after exhausting legal avenues, it faces default if it cannot reach a last-minute deal. According to bank sources and media, a group of private banks in Argentina is set to offer to put up $250 million as a guarantee to convince lead holdouts of the nation's good faith and convince Griesa to re-establish the stay.

Kicillof's unexpected appearance in New York raised hopes that there was still time to avoid a default that would bring more pain to an economy already in recession, though not the economic collapse seen in 2002 when it defaulted on $100 billion in debt.

The Buenos Aires government has pushed hard for a stay of the U.S. court ruling that triggered Wednesday's deadline.

Its chances of success were boosted on Tuesday when holders of Argentina's euro-denominated exchanged bonds said a suspension would encourage a settlement.

They also said they would facilitate a deal by waiving the so-called 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.

"Obtaining a waiver of the RUFO clause, however, will take time," the group of bondholders said in an emergency motion for a stay filed on Tuesday.

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.

Christine Lagarde, the head of the International Monetary Fund, said on Tuesday that an Argentine default was unlikely to prompt broader market repercussions, given the country's relative isolation from the international financial system.