The knee-high person - who wears a pointy hat and has a distinctive sideways walk – was caught on video two weeks ago by a terrified group of youngsters.
Millions of stunned people viewed the chilling clip after The Sun reported the tale - with some sceptics claiming the footage just showed a dwarf causing mischief.
But detectives in the Argentinean town of General Guemes have dubbed the gnome the new 'Bigfoot' after hundreds of locals reported actually seeing the creature at least once in their lifetime.
Only weeks before it was captured on camera, spooked rail workers called the police to say they had spotted the crab-walking gnome side-stepping its way around the train tracks at night.
National newspaper El Tribuno has reported that fear is now so widespread that the town mayor Salta has been inundated with calls from terrified locals and has launched a full scale police enquiry into the affair.
He said: “I am a little sceptical because I have never personally seen these gnomes - but it’s definitely possible that they exist.
"People here believe in them and we have to respect that.
"I do not think that it is completely impossible. Gnomes are part of our culture here.”
And Police Commissionaire, José Luis Núñez - who has been charged with tracking down the creature's lair, said: "I personally believe in gnomes as I saw one when I was a child.
"But so far we have not been able to determine whether the figure on tape was real or not."
A local poll showed 90 per cent of General Guemes 30,000 residents believed gnomes stalked the streets at night.
Teenager Jose Alvarez captured the creature on video while larking about with pals.
He said: “We were chatting about our last fishing trip. It was one in the morning. I began to film a bit with my mobile phone while the others were chatting and joking. Suddenly we heard something — a weird noise as if someone was throwing stones.
"We looked to one side and saw that the grass was moving. To begin with we thought it was a dog but when we saw this gnome-like figure begin to emerge we were really afraid.
“This is no joke. We are still afraid to go out — just like everyone else in the neighbourhood now.
"One of my friends was so scared after seeing that thing that we had to take him to the hospital."