Pure functional programming languages do not allow mutable data, but some computations are more naturally/intuitively expressed in an imperative way -- or an imperative version of an algorithm may be more efficient. I am aware that most functional languages are not pure, and let you assign/reassign variables and do imperative things but generally discourage it.
My question is, why not allow local state to be manipulated in local variables, but require that functions can only access their own locals and global constants (or just constants defined in an outer scope)? That way, all functions maintain referential transparency (they always give the same return value given the same arguments), but within a function, a computation can be expressed in imperative terms (like, say, a while loop).
IO and such could still be accomplished in the normal functional ways - through monads or passing around a "world" or "universe" token.
The short answer is: there are systems to allow what you want. For example, you can do it using the ST monad in Haskell (as referenced in the comments).
The ST monad approach is from Haskell's Control.Monad.ST. Code written in the ST monad can use references (STRef) where convenient. The nice part is that you can even use the results of the ST monad in pure code, as it is essentially self-contained (this is basically what you were wanting in the question).
The proof of this self-contained property is done through the type-system. The ST monad carries a state-thread parameter, usually denoted with a type-variable s. When you have such a computation you'll have monadic result, with a type like:
foo :: ST s Int
To actually turn this into a pure result, you have to use
runST :: (forall s . ST s a) -> a
You can read this type like: give me a computation where the s type parameter doesn't matter, and I can give you back the result of the computation, without the ST baggage. This basically keeps the mutable ST variables from escaping, as they would carry the s with them, which would be caught by the type system.
This can be used to good effect on pure structures that are implemented with underlying mutable structures (like the vector package). One can cast off the immutability for a limited time to do something that mutates the underlying array in place. For example, one could combine the immutable Vector with an impure algorithms package to keep the most of the performance characteristics of the in place sorting algorithms and still get purity.
In this case it would look something like:
pureSort :: Ord a => Vector a -> Vector a
pureSort vector = runST $ do
mutableVector <- thaw vector
sort mutableVector
freeze mutableVector
The thaw and freeze functions are linear-time copying, but this won't disrupt the overall O(n lg n) running time. You can even use unsafeFreeze to avoid another linear traversal, as the mutable vector isn't used again.