BUENOS AIRES, Argentina (AP) — Stocks fell sharply in Argentina on Thursday as the country defaulted on its bills for the second time in 13 years, raising fears the move could diminish foreign reserves, stoke inflation and drive the economy deeper into recession.

The Merval stock index was down nearly 7 percent in midday trading after Argentina walked away Wednesday evening from talks in New York, where a court-appointed mediator led negotiations with U.S. hedge funds demanding some $1.5 billion

Earlier Wednesday, shares had rallied when a group of private Argentine bankers announced it would offer to buy up the disputed debt. Such a deal would have enabled Argentina to make a late interest payment owed to a separate group of bondholders, which would have allowed it to avoid default.

"The stock exchange is falling heavily because it was, in the end, surprised by the fact that negotiations yesterday were frustrated," said Belen Olaiz, an economist with ABECEB.com Consultants in Buenos Aires.

Olaiz said some investors may also have been spooked by Economy Minister Axel Kicillof's sharp criticism of the hedge fund investors, raising worry the dispute is far from resolution. Speaking to reporters after the collapse of talks, Kicillof repeatedly referred to the investors as "vultures" and called their demands "extortion."

The default did not seem to rattle global markets, largely because investors have been well aware of Argentina's problems since its record $100 billion default in 2001. Also, traders had been preparing for a worst-case scenario before the talks fell apart, and many still hope a deal will be struck soon.

"The markets already sold off a fair amount before the news late yesterday night that we were definitely going into a default scenario," said Alberto Ramos, who analyzes Argentina for Goldman Sachs. "But now, there's still the possibility that some deal is reached between the holdouts and some private entity."

If a private group were to buy the debt, he said, that could lift a court order blocking Argentina from paying $539 million in interest due to bondholders "and the default can be cured rather rapidly. So if you hold those bonds for now ... the bonds should rally."

Argentina's options to satisfy the hedge funds are limited until at least the end of the year. That's when a clause in its 2005 and 2010 debt-restructuring agreements will expire, freeing it from an obligation to pay those earlier bondholders terms equivalent to whatever deal it may reach with the hedge funds. Violating that clause, Argentina says, could make it liable to claims of more than $109 billion.

Ordinary Argentines seemed to take the default in stride, having grown used to difficulty. Although they feel the pressure on the frail economy, they say it's not as bad as the crisis of 13 years ago, when one of every five Argentines was out of work and some reported going hungry. Banks froze deposits and barricaded behind sheet metal as thousands of protesters unsuccessfully tried to withdraw their savings. At least 27 people died in protests as Argentina defaulted and saw a revolving door of five presidents in two weeks.

"Until the end of the year, it's going to be a very bad period and after that I think at least that they will have come to some agreement ... But, well, here we are used to it," said Antonio Emilio a 68-year-old resident of the capital.

President Cristina Fernandez was expected to address the nation later Thursday and the judge presiding over the legal dispute in New York had scheduled a meeting for Friday. Some observers believe a deal may still be possible before the situation deteriorates further.

Kicillof on Wednesday held firm to his government's position that it could not accept a deal that "jeopardizes the future of all Argentines." Any immediate effects, he said, would be minimal.

"Argentines can remain calm because tomorrow will just be another day and the world will keep on spinning."

Court-appointed mediator Daniel Pollack said a default could hurt bondholders who were not part of the dispute as well as the Argentine economy, which is suffering through a recession, a shortage of dollars and one of the world's highest inflation rates.

"The full consequences of default are not predictable, but they are certainly not positive," Pollack said.

The holdouts, led by NML Capital Ltd., blamed Argentina for the failure to reach an agreement. In a statement, the hedge fund run by New York billionaire Paul Singer said the mediator had proposed "numerous creative solutions," to resolve the standoff.

"Argentina refused to seriously consider any of them, and instead chose to default," it said.

The hedge funds spent more than a decade litigating for payment in full rather than agreeing to provide Argentina with debt relief. They also sent lawyers around the globe trying to force Argentina to pay its debts and were able to get a court in Ghana to temporarily seize an Argentine naval training ship. The threat of seizures forced Fernandez to stop using her presidential plane and instead fly on private jets.

Restoring Argentina's sense of pride and sovereignty after the 2001-2002 economic collapse has been a central goal of Fernandez and her predecessor and late husband, Nestor Kirchner.

Argentina has made efforts to return to global credit markets that have shunned it since the 2001 default. The government paid its debt to the International Monetary Fund and agreed in May with the Paris Club of creditor nations on a plan to begin repaying $9.7 billion in debts unpaid since 2001. It also agreed to a $5 billion settlement with Grupo Repsol after seizing the Spanish company's controlling stake in Argentina's YPF oil company.

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Associated Press writers Ben Fox and Paul Byrne in Buenos Aires and Luis Andres Henao in Santiago, Chile contributed to this report.