Argentina's plan to exit debt default ruled 'illegal' by US court

"It is illegal, and the court directs that it cannot be carried out," he said said at a hearing in New York.

The judge declined to hold Argentina in contempt despite the urging of the two leading holdout creditors, saying such a finding would not "add anything to the scales" to encourage a settlement.

Argentina missed a June interest payment after Mr Griesa blocked payments owed to holders of debt issued under US law that was restructured in 2005 and 2010.

He had ruled in July that the country must first pay the hedge funds holding out for full payment on the bonds on which it defaulted in 2001.

The hedge funds, which bought Argentina's bonds at a big discount after its economic meltdown and previous default in 2001-02, are owed an estimated $1.3bn (£766m).

Argentina has consistently refused to pay them, saying it cannot afford to do so, and called them "vultures" for refusing to swap their bonds for lesser valued ones.

The country's government wants to replace Bank of New York Mellon, which, under an earlier ruling by the US judge, is holding a $539m payment by Argentina to its creditors, as trustee with state-run Banco Nacion.

Argentina would then be allowed to pay the $539m to bondholders, a majority of whom must agree to the plan.

US hedge fund Aurelius Capital Management called Argentina's leaders "outlaws" for considering the move.

Lawyers for Aurelius and fellow bondholers Elliott Management are suing for payment after not participating in the country's restructurings and have also sought to get the Argentine government found guilty of contempt of court.

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