(Recasts, adds Fernandez comment)
By Hugh Bronstein
BUENOS AIRES, Sept 24 (Reuters) - Argentine President Cristina Fernandez accused hedge funds suing the country for full repayment of defaulted debt of practicing "economic and financial terrorism", heightening the rhetoric in the country's years-long legal battle with the investors.
Speaking before the United Nations General Assembly on Wednesday, Fernandez said "terrorists are not only those who set off bombs, but also those who destabilize economies, causing hunger, misery and poverty."
The comment came just hours after Fernandez's cabinet chief Jorge Capitanich accused Germany of having a "hostile attitude" toward Argentina's debt restructuring effort, citing an advertisement by the hedge funds which quotes a German official criticizing Argentine policy.
Both flights of rhetoric stem from a case that has become a rallying cry for Fernandez, who often characterizes the funds as "vultures" out to wreck Argentina's finances in their pursuit of astronomical profits.
"The vulture funds," Fernandez told the General Assembly, "are practicing a kind of economic and financial terrorism".
The day started with the full-page advertisement, paid for by the Virginia-based American Task Force Argentina, that appeared in local dailies Clarin and La Nacion. The ad quoted German Finance Minister Wolfgang Schauble calling Argentine policymaking "an example of lack of strength."
Capitanich shot back that "Germany has always had a hostile attitude toward Argentina, from an economic and financial point of view." He noted that Germany was among 11 countries including the United States that on Sept. 9 voted against Argentina's proposal that the United Nations adopt a multilateral legal framework for sovereign restructurings.
The Task Force lobbies for hedge funds in the case led by Elliott Management's NML Capital Ltd and Aurelius Capital Management.
Tempers have risen since Argentina's July sovereign debt default, which sealed the South American country's exclusion from the international capital markets at a time of recession, sinking central bank reserves and soaring inflation.
Last week Fernandez's government expressed "deep indignation" after a U.S. diplomat referred to the country as being in default.
Argentina says it is not in default because it made every effort to make its July coupon payment on restructured bonds. The government deposited the $539 million with an intermediary bank but payout was blocked by a U.S. federal court.
Fernandez's tough position is popular on the streets of Buenos Aires but has exasperated U.S. judge Thomas Griesa who is hearing the case. Griesa on Wednesday threatened to hold Argentina in contempt of court and fine it $50,000 per day for violating his order to settle with the hedge funds.
Millions of middle class Argentines hit poverty when their government defaulted on about $100 billion in bonds in 2002. Most of that debt was later restructured in deals offering less than 30 cents on the dollar.
Elliott and Aurelius scoffed at those terms and sued for 100 cents on the dollar, having paid only a fraction of that for bonds that were already in default when they bought them.
The July coupon payment was blocked by U.S. District Judge Thomas Griesa, who said Argentina must pay the funds $1.3 billion before any more payments can be made on Argentina's restructured debt. (Additional reporting by Walter Bianchi, Alejandro Lifschitz and Nate Raymond; editing by Andrew Hay)