(Adds Argentina's appeal to U.S. court)
By Hugh Bronstein
BUENOS AIRES, April 6 (Reuters) - Argentine central bank regulators entered Citibank Argentina's headquarters on Monday, as the battle intensified between the government and a group of U.S. hedge funds that refuse to accept discounted payment terms on the country's defaulted debt.
Argentina's securities regulator says Citibank Argentina violated local laws by striking a deal with the hedge funds. It has suspended Citibank Argentina from conducting capital market operations and stripped its CEO's authority.
"There will be an inspection of Citibank Argentina today to ensure it is functioning," a central bank spokesman said. The regulators' task will be to monitor operations, not take over management of the bank, he said.
Four inspectors wearing central bank lapel pins were later seen entering the bank's headquarters in Buenos Aires.
A spokesman for Citigroup, Citibank Argentina's parent group, had no comment on the situation.
Argentina on Monday appealed a U.S. federal court order that it said "erroneously modified and extended" a ruling preventing payment on its restructured bonds under Argentine law.
The order led to Argentina failing to complete an interest payment on local law bonds for the first time since it tipped back into default in July.
The case stems from a decade-long legal feud between President Cristina Fernandez's government and New York-based hedge funds over the payment terms offered in bond swaps that followed Argentina's record 2002 default.
U.S. Judge Thomas Griesa has awarded the hedge funds full payment on the defaulted debt and barred Argentina from servicing its restructured debt until it settles with the creditors.
Fernandez has argued Griesa overstepped his bounds and accused the judge of siding with the funds she vilifies as vultures. Her leftist government had insisted that Citibank Argentina, which portrays itself as an innocent party caught in the legal battle, keep processing payments.
After Citibank Argentina announced it wanted to quit its role as custodian of some of the local law bonds, the securities regulator announced a local financial house would take over.
Four days later, on April 1, the central bank said Gabriel Ribisich, head of Citibank Argentina, could no longer represent the bank because he "ignored Argentina's legal framework regarding sovereign debt restructuring."
Citibank Argentina, the country's 12th largest bank, has appealed the decision to remove Ribisich to the local courts, according to media reports. The Argentine Banking Association said the central bank did not observe "the constitutional guarantees of due process" in removing the bank chief. (Additional reporting by Walter Bianchi and Magali Cervantes in Buenos Aires and Nate Raymond in New York; Editing by Paul Simao, Gunna Dickson and Bernard Orr)