Argentina's new government on Friday sought special powers from Congress to reform the economy, setting the stage for a devaluation of its peso currency and creation of a dual exchange rate system in a bid to rescue Latin America's No. 3 economy from meltdown.

President Eduardo Duhalde sent a bill to Congress requesting powers to reform the foreign exchange and banking systems, regulate prices of goods and services, safeguard the value of savers' bank deposits and ensure debtors do not go bankrupt.

The bill, which Congress will debate on Friday and Saturday, contained no more details on devaluation of the peso — which has been pegged to the dollar at one-to-one for a decade. Duhalde's aides say the devaluation could be around 30 percent.

It was not clear how a dual exchange rate system would work. Many Argentines fear a return to the currency paranoia of the 1980s, when unofficial traders lined streets offering dollars.

Duhalde is scrambling for Congress, business and union support to help end a four-year recession that sparked unrest in December, toppling Fernando de la Rua's government and leaving 27 dead.

He urged shopkeepers to help avoid a return to the rioting and looting by resisting the impulse to increase prices.

But already medicines like insulin have become scarce as suppliers seek to avoid currency losses and some shops have raised prices to hedge against devaluation. Duhalde has been forced to ask neighboring Brazil for emergency drug shipments.

Argentina defaulted on Thursday on part of its $141 billion debt — which could herald the biggest default in history.

"We are on the eve of important decisions that I cannot announce to you yet, but in these first days let's be very careful — since the devaluation is taken for granted in our country — with basic consumer items," Duhalde, a populist chosen by Congress as interim president, said in a speech to businessmen on Friday.

Business Skeptical

Duhalde's speech was met with skepticism.

"I bet he'll tell the bankers exactly what they want to hear too," one businessman from the engineering sector said.

The proposed bill would convert private contracts to pesos in a country whose currency has been pegged one-to-one to the dollar for a decade and where even house purchases are made with wads of dollars. It would restructure small dollar debts to protect peso-earning Argentines from the devaluation.

Congress is dominated by Duhalde's Peronist Party which ran the country from 1989 to 1999 and racked up much of the debt now crippling Argentina.

The man tapped to become treasury secretary, Sen. Oscar Lamberto, said the new currency plan envisages a free-floating exchange rate system alongside an official fixed exchange rate to replace the one-to-one peso-dollar peg in place since 1991.

The government also planned a "sharp" reduction in spending demanded by the International Monetary Fund and Washington and expected "favorable effects" in six months, he said.

"The idea is that there be two (currency) markets," said Lamberto. "An official market, established by the monetary authority ... and a free market, for non-priority transactions in which the currency will fluctuate according to the market."

A government source told Reuters Argentina also plans to renegotiate and honor debts to multilateral lenders like the IMF, but said no negotiations were yet under way.

IMF First Deputy Managing Director Anne Krueger was expected to talk to Economy Minister Jorge Remes Lenicov at some point on Friday, sources at the lender said.

Argentina's foreign creditors meanwhile will refrain for now from demanding immediate payment on their defaulted bonds and try to negotiate a restructuring.

Devaluation to Hit Banks

Converting dollar debts into pesos should help shield the average Argentine from the impact of the devaluation, but it shifts the burden to the banks, which will need help.

Duhalde expressed little sympathy for banks, talking of "ending the decades-old alliance between politics and the financial world, instead of the productive sector."

"Without support the banks would not remain viable," said a Lehman Bros research note. "Given that the government neither has the means to provide this support nor defend/shepherd the floating or re-pegged peso, we assume IMF support."

However, the bill included a proposal to tax oil exports to compensate banks for what will prove a costly restructuring of dollar debts.

The one-to-one peg wiped out the hyperinflation plaguing Argentina a decade ago, but is widely blamed for the current recession. Its removal should help exporters compete abroad.

But some analysts expect a dual exchange rate system to simply open the door to more of the endemic corruption that helped bankrupt Argentina in the first place.

"The ambiguity between the two exchange rates opens the way for corruption and abuse," said Walter Molano, an analyst for U.S.-based BCP Securities.

The Peronists hope devaluation will only be a short-term sacrifice for Argentina's 36 million people, eventually boosting growth by lowering labor costs and helping exports.

People of Italian descent lined up at the Italian consulate for passports and Italy set up an Argentine crisis hotline for worried relatives and investors alike.

Repercussions were felt in markets exposed to Argentina as far afield as Spain and Hong Kong.

Shareholders in financial giant HSBC Holdings, operating in Argentina, braced for up to $4.9 billion in write-offs after Argentina formalized the debt default.

However world markets have had plenty of time to insulate themselves from what has been billed as the best flagged financial crisis in history, and most expect to see little contagion spilling over from the emerging debt pariah.