The United States Treasury Secretary, Paul O'Neill, says signs of economic recovery in Argentina should not be set back by the country's failure to meet a debt repayment to the World Bank on Thursday.

Mr O'Neill said the Argentine economy had improved over the last six months, and the US still hoped Argentina would be able to agree a new aid package with the International Monetary Fund (IMF).

Argentina was not going to accept the policy of savage budget adjustments as a strategy for getting over its problems

Argentine Cabinet Chief Alfredo Atanasof

Argentina has blamed the IMF for forcing it to default on the loans.

Officials said negotiators had been close to agreement when the IMF made new demands for savage budget cuts.

The IMF's managing director Horst Koehler said on Friday that the fund was still committed to finding a deal with Argentina.

But he warned that Argentina had to show there was some "substance" behind the promises.

The two sides have been negotiating for the past 11 months in an attempt to reach a deal, but worries have persisted that Argentina will not be able to push through the necessary reforms.

Loans blocked

On Thursday, Argentina defaulted on a debt repayment of $805m due to the World Bank. making instead only an interest payment of $79.2m.

In response the World Bank said it would not consider any new loans for the country, and access to current loans would be removed unless the debt was paid within the next 30 days.

The Argentine government said its inability to strike a deal with the IMF meant it did not have enough money to pay up.

"Argentina was not going to accept the policy of savage budget adjustments as a strategy for getting over its problems," said Cabinet Chief Alfredo Atanasof.

"That's how we ended up in the longest negotiation in the history of the IMF."

Still hope

On Thursday, Argentina's Economy Minister Roberto Lavagna, who had been attending talks with the IMF in Washington, said negotiations with the Fund would continue and that he was hopeful of reaching a deal.

And on Friday, the IMF's managing director Horst Koehler said the Fund was still committed to a deal.

"We are working with them," he told reporters.

"We do think that we made some progress and there's a commitment to come to a conclusion, but of course the substance has to be there."

The IMF has indicated that the two outstanding issues that need to be resolved are control of public spending and anti-inflation policies.

Economic crisis

The IMF cut off its lending after Buenos Aires defaulted on $140bn of private international loans late last year.

The World Bank's decision to end any new loans has cut off one of its last chances of external finance.

Argentina's economy has been in recession for four years, the is expected to shrink by more than 10% this year.

More than half the country's 36 million population are now living below the poverty line.

Analysts said the latest default is unlikely to affect the man in the street.

"I think Argentines are already used to the idea that we're in default with everybody in the world," said Hernan Fardi, an economist for Maxinver consultancy.

"I don't think it affects everyday people that much. You might see some nerves in markets but, for now, that's all."