BUENOS AIRES, Oct 26 (Reuters) - Argentine stocks rose to a record high on Friday, two days before a presidential election, buoyed by optimism in global markets over a possible cut in U.S. interest rates, traders said.

The MerVal index <.MERV> of 25 leading stocks jumped 1.95 percent to 2,327.15 points, surpassing July's record high of 2303.43 points.

"Both the good international context and the strong liquidity prevailing on the local market paved the way for the upward trend to continue today," said Ruben Pascuali, a trader with Mayoral Bursatil.

Analysts expect the U.S. Federal Reserve to cut interest rates again at its upcoming meeting, thereby making riskier emerging markets holdings more attractive.

"The MerVal rose to new highs due to the good external context, but above all due to the strong impact of returning capital by pension funds," said Augusto Farina, a trader with Almirante Galitis brokerage.

The Argentine government announced last week that pension funds -- the most liquid players in the local market -- had to scale back their investments in other Mercosur countries to help expand credit for local firms and projects.

The Mercosur trade bloc includes Argentina, Brazil, Paraguay and Uruguay as full members.

The government move means the funds will have to bring 2.83 billion pesos ($877.5 million) back to the Argentine market before year's end.

Leading gains, steel pipemaker Tenaris <TENA.BA> climbed 4.25 percent to close at 85.7 pesos per share, while entertainment group Comercial del Plata <COM.BA> jumped 5.1 percent to 0.72 pesos per share.

For the second day in a row, volume at the Buenos Aires Stock Exchange was unusually hefty at 188.2 million pesos ($58.5 million). Of active shares, 59 advanced, 18 declined, and 12 were unchanged.

Bond prices on the local market soared on election expectations, as investors speculated a win by front-runner Sen. Cristina Fernandez de Kirchner in Sunday's presidential vote could lead to reopened negotiations with "holdout" creditors who rejected the 2005 sovereign restructuring.

Bonds shot up 2.5 percent on average <AR/BONOS>, led by a 4 percent gain by peso-denominated Discount bonds.

Argentine debt may have risen as well due to the government's buy-back of $500 million worth of bonds issued during the restructuring, such as the Discount paper.

The peso currency firmed amid cautious pre-election trade as exporters and the central bank injected dollars to offset a recent slump.

The peso <ARSB=> closed 0.31 percent stronger at 3.2125/3.2150 per U.S. dollar in informal trade between foreign exchange houses, as measured by Reuters.

In formal interbank trade, where the central bank regularly intervenes to keep the peso steady, the currency firmed 0.24 percent to 3.1700/3.1725 per dollar <ARS=RASL>. ((Reporting by Walter Bianchi and Jorge Otaola, writing by Katie Paul, Editing by Diane Craft; Reuters Messaging: [email protected]; E-mail: [email protected]; Tel. +54 11 4318 0634)) Keywords: MARKETS ARGENTINA/