Oct. 18 (Bloomberg) -- Argentina broadened its restrictions on pension fund investments to include Brazil, Uruguay and Paraguay, fellow members of the Mercosur trade bloc, in a bid to keep more capital at home and sustain economic growth.

Pension funds may invest no more than 2 percent of assets in the countries by the end of 2008, the Economy Ministry said today in a statement. The move will force them to sell investments valued at 8 billion pesos ($2.5 billion), said a ministry spokesman who didn't provide his name, citing internal policy.

The new rule is part of President Nestor Kirchner's efforts to increase investment in Argentina, which is heading toward a fifth year of economic growth exceeding 8 percent. Yesterday, he urged banks to cut interest rates and boost lending. The moves come less than two weeks before presidential elections in which his wife, Cristina Fernandez de Kirchner, is favored to win.

``The government is trying to run the economy by decree,'' said Pedro Tuesta, senior Latin America economist at 4Cast Inc. in Washington. ``They want lower interest rates and a weak currency. This will add pressure to inflation.''

Previously, there was no limit on pension funds' investments in Mercosur countries. The government will keep a 10 percent cap on foreign investments outside Mercosur, the ministry spokesman said. The new measure will help provide funds for Argentine companies to invest in new projects, today's statement said.

Argentina's benchmark stock index, the Merval Index, rose 0.7 percent at 3 p.m. New York time.

Consumer prices rose 8.6 percent in September from a year earlier, down from 10.4 percent in September last year. Some economists and politicians say the government has underreported inflation since Kirchner replaced officials in charge of the data at the National Statistics Institute in January. Kirchner has said the reports are accurate.

To contact the reporter on this story: Eliana Raszewski in Buenos Aires eraszewski@bloomberg.netBill Faries in Buenos Aires wfaries@bloomberg.net

Last Updated: October 18, 2007 15:27 EDT