* Says "not necessary" to reform the financial entity law
* Stocks soar, investors had worried about move against YPF
* Economists warn proposed cenbank rule could fuel inflation (Adds analyst comment)
By Hugh Bronstein
BUENOS AIRES, March 1 (Reuters) - Argentine President Cristina Fernandez sent a bill to Congress on Thursday aimed at helping the government tap more central bank reserves to help repay foreign debt and defend the country's currency.
Economists panned the move, saying it will add to inflation, but share prices shot higher as the charismatic 58-year-old leader ended a three-and-a-half-hour-long annual address to Congress without announcing any moves against local banks or oil company YPF, which had been expected by the markets.
"We have to know that the central bank is functioning for the good of the real economy," she said during the speech. The bank has about $46.9 billion in foreign currency reserves.
Over the last two years, Fernandez's unconventional government has resorted to paying private creditors with central bank reserves left over after what the bank needs to back up cash in the economy. Those excess reserves have shrunk to near zero, prompting Fernandez to request a change in the "convertibility" law.
"This is a negative development," said Goldman Sachs analyst Alberto Ramos, who pointed out the risk that the new policy could stoke already high inflation.
"Reserve transfers to the Treasury are debasing the balance sheet of the central bank and contributing to financing an admittedly expansionary and pro-cyclical fiscal stance, which, jointly with an extraordinarily accommodative monetary stance, continues to stoke high inflationary pressures," he said.
Fernandez, loved by voters who benefit from her government's generous welfare spending, easily won a second four-year term last year despite rankling Wall Street with policies such as raiding central bank reserves and publishing unreliable economic data.
Orthodox economists fear the government is ignoring the country's inflation rate, estimated by private analysts at over 20 percent annually, and that Fernandez's central bank reserve proposal will put additional upward pressure on consumer prices.
"We're in a dangerous game," said Rodolfo Rossi, a former central bank chief who is often critical of Fernandez's policies. "This is about inflation."
The president said she would not push for banking reforms that the private sector feared might obligate banks to make loans to small and medium-sized businesses.
Bank shares soared when Fernandez said it was "not necessary" to reform the financial entity law. Grupo Financiero Galicia shares jumped 5.7 percent and the stock price of Banco Santander Rio rose 4.3 percent.
Shares in YPF, controlled by Spain's Repsol , were up more than 13 percent in afternoon trade after Fernandez announced no new measures affecting the company.
The president had been expected to announce steps against the company, which has faced intense government pressure in recent weeks to boost its production of oil and natural gas. YPF shares were trading at 143 pesos per share.
"This was positive news in the wake of the recent rumblings about YPF, which had done a lot to scare the market," said Walter Molano, who analyses emerging markets for BCP Securities.
The Spanish government has lobbied Argentina to avoid any punitive measures against the company.
Nomura Securities told clients in a research note that Fernandez surprised the market.
"The first positive news was regarding YPF, where no negative announcement was made, opposite from all expectation," it said.
"The second announcement was regarding the central bank, where she is proposing the end of 'convertibility'. The idea is that the bank will no longer use 'free reserve' concept, meaning that the Treasury will be able to borrow directly from the bank's international reserves to pay external debt," it added.
The country's Merval stock index was up 3.8 percent after Fernandez's address. (Additional reporting by Helen Popper and Juliana Castilla; Editing by Padraic Cassidy and Diane Craft)