(Adds details from regulator's statement, context)
By Richard Lough
BUENOS AIRES, March 27 (Reuters) - The Argentine securities regulator said on Friday Citibank Argentina had violated local laws in striking a deal with litigating U.S. hedge funds and suspended the bank from conducting capital market operations.
Under the accord, Citibank agreed not to appeal a U.S. court ruling that interest payments on Argentina's restructured local law bonds could not be processed if the bank was allowed to make two one-off payments to help it exit its local custody business.
The leftist government is concerned the agreement may further hamper the chances of future interest payments reaching bondholders on debt exchanged after its record 2002 default.
The punitive measure was imposed "on the grounds that there is a situation of grave danger and uncertainty for holders of restructured debt", the regulator said.
Citibank Argentina's parent group, Citigroup, declined to comment immediately.
The securities regulator added that local financial institution Caja de Valores would take over the administration of the Argentine coupon payments that Citibank had previously processed.
The next payment on Argentina's restructured dollar denominated Par bonds is due on March 31. If Argentina fails to complete payment, its July default on foreign-law exchanged bonds will spread to local law bonds.
The regulator said that the suspension from capital market operations did not affect Citibank Argentina's retail banking operations.
Citibank Argentina portrays itself as an innocent party caught up in a bitter court battle between the Argentine government and the New York-based funds after they were awarded full payment on their defaulted debt by a U.S. judge.
The judge, Thomas Griesa, barred Argentina from servicing its performing debt until it settled with the creditors, but Argentina insisted Citibank keep processing payments.
Citibank Argentina opened its first branch in 1914. It is the country's 12th largest bank by deposits with 22.82 billion pesos ($2.67 billion) as of December, about 2.6 percent of all deposits in the Argentine banking system, central bank data shows. (Reporting by Richard Lough; Editing by Bernard Orr and Ken Wills)