Argentina missed a $28 million bond payment due on Thursday, a government source said, touching off a debt default that could become the biggest in history.

"We are now in default. The bond payment was not made,'' a government source told Reuters on condition of anonymity on the same day that new President Eduardo Duhalde swore in his cabinet.

Argentina is now poised to break the decade-old one-to-one peso peg to the dollar, according to Duhalde's advisers. They say the peso could be devalued by 30 to 40 percent against the dollar.

By missing the payment on a 2007 Italian lira bond, the country formally slid into default, a step that has been a foregone conclusion since Argentina suspended payments on its $141 billion public debt last month, as the government was toppled in bloody riots.

Argentina, Latin America's third largest economy, has recently seen the worst civil unrest in a decade triggered by deepening austerity and poverty. The country has around $3 billion in debt due to expire through to the end of March, including nearly $1 billion owed to the International Monetary Fund due in January.

However the Fund has said most of that $1 billion can be deferred under the terms of the loan.

Following the suspension of payments, announced on Dec. 23, defaulting in the true sense of the word -- by missing a debt payment -- was inevitable. There was no surprise.

"This was largely anticipated,'' said Fernando Losada, senior Latin American economist at ABN-AMRO in New York.

"The new president had already confirmed that payments on external debt would be suspended, so it was just a matter of time,'' he added.

But analysts said Argentina will nevertheless pay the price as a pariah on the world debt market.

"After a default, your credit gets totally cut off. The economy practically stops. There are no investments from abroad. It's exactly the opposite of what the government says it wants to do,'' said Ruben Pasquali, analyst at Mayoral brokerage.


Meanwhile, at the government's first news conference, Duhalde's top aide said Argentina will restructure the public debt pile according to its repayment ability.

"We intend for a sustainable program to have international cooperation and support ... and through that support we hope to be able to restructure our debt in a way that is compatible with our ability to pay,'' Cabinet Chief Jorge Capitanich told reporters soon after he was sworn in on Thursday.

Duhalde filled other key cabinet posts on Thursday, including economist Jorge Remes Lenicov as Economy Minister. The government is due to announce details of its economic plan, including the devaluation that investors and the public alike are expecting, on Friday.

Analysts say life under Duhalde and Remes Lenicov, who are in power until 2003, may lead to a shift to populism -- including job handouts and trade protectionism.

That would also mark an abrupt turn away from the free-market policies of the last decade that made Argentina a darling of Wall Street but failed to solve rising unemployment now affecting nearly 20 percent of the workforce.