The court ruled on Monday that Argentina was in contempt, but held off on any fines or sanctions against the country.

Federal district judge Thomas Griesa reiterated that the country had skirted his orders for the country to pay off the debts to the hedge funds Aurelius Capital Management and NML Capital ahead of other creditors.

"The problem is that the Republic of Argentina has been and is now taking steps in an attempt to evade critical parts" of the order, Griesa said.

"The court holds and rules that those proposed steps are illegal and cannot carry on," he said. Griesa added it was a "rare thing" for a US court to rule a country in contempt.

The ruling came after Buenos Aires passed domestic legislation allowing it to make other debt repayments by transferring its bonds away from US jurisdiction.

Argentine President Kirchner has backed legislation allowing transfers to be made outside US jurisdiction

The country defaulted on $100 billion debt in 2001 - the largest default in history at the time. Buenos Aires persuaded 93 percent of its creditors to incur losses of up to 70 percent on the face value of their bonds.

'Vulture funds' prioritized

However, Aurelius Capital Management and NML Capital refused to accept the write-down and won a case against Argentina, which was ordered to pay in full. Argentine President Cristina Kirchner has labeled the plaintiffs "vulture funds" and the Argentine government has so far refused to comply.

Griesa in July blocked Argentina's attempts to repay other creditors unless it first paid more than $1.3 billion owed to the two hedge funds. The payments failed as a result, and the country was ruled to be in "selective default."

Earlier on Monday, the Argentine ambassador to Washington warned Secretary of State John Kerry that a contempt ruling would lead to an "unprecedented escalation" in the dispute.

Ambassador Cecilia Nahon said any such decision "would not only fall outside the jurisdiction of said courts, but also be an unlawful interference in the domestic affairs of the Argentine Republic, triggering the international liability of the United States of America."

rc/lw (AFP, Reuters)