By Walter Bianchi and Jorge Otaola

BUENOS AIRES Argentina's markets have a new cause for the wobbles - a presidential election whose outcome is anyone's guess and could usher in a radical libertarian candidate who investors can't work out whether they should love or fear.

With less than three weeks to the Oct. 22 vote, bonds are sliding and the peso has slumped to a record 800 per dollar on the popular black market - which reflects the local currency's true value while the official peso is caged by capital controls.

"The dollar going past 800 pesos and bonds falling are a reflection of hedging by investors," said Roberto Geretto, an economist at local investment fund Fundcorp. "The electoral trade has become election fear."

The vote sees outsider Javier Milei in the driving seat. He's pledged some market-friendly plans including sharp spending cuts and dollarizing the economy, but remains an unknown and volatile entity. He also wants to shut down the central bank.

His main rivals are the ruling center-left coalition's economy chief Sergio Massa and conservative ex-security minister Patricia Bullrich. Milei leads in polls but analysts expect a second-round run-off - though they say anything is possible.

A candidate wins outright with 45% or 40% and a 10-point lead over second place. Otherwise a head-to-head run-off will be held on Nov. 19 to choose Argentina's next president.

The election uncertainty has compounded an already complex economic crisis following years of economic mismanagement, deep fiscal deficits and ballooning debt. Inflation is at 124% annually, net central bank reserves are negative, while the government was forced to devalue the peso by 20% in August.

Poverty - households living on less than the equivalent of $215 a month in and around the capital Buenos Aires, a number that varies in other parts of Argentina - has crossed 40% and interest rates are at 118%, throttling credit.

"International weakness, electoral policies to stimulate demand at the cost of a bigger deficit and more monetary issuance, plus the very uncertainty the elections radiate, have formed the perfect storm," GMA Capital said in a note.

The South American country's over-the-counter sovereign debt, already in distressed territory after a major default and restructuring in recent years, fell by over 10% last week, led by local currency bonds. It dropped further on Monday.

Investors are betting on another devaluation after the election, putting pressure on the peso and leading to a rush to dollarize their holdings. The black market exchange rate is over 100% away from the official rate of 350 pesos per dollar.

"With less than a month until the general elections, the local market appears to be weakening due to expectations of a jump in the exchange rate," said Mauro Natalucci of local brokerage Rava Bursátil.

Future peso operations show bets on an imminent devaluation of the currency. By December deals are around 682 pesos per dollar and by May 2024 at 1,058.

"In the midst of the climate of high political and economic uncertainty, dollarization has been intensifying due to the proximity of the elections and the growing concerns about the political road ahead," said economist Gustavo Ber.

"Among them is a new devaluation amid a context of high inflation."

($1 = 349.9500 Argentine pesos)

(Reporting by Walter Bianchi and Jorge Otaola; editing by Adam Jourdan and Mark Heinrich)