(Adds context and additional comments from Gramercy and Peru)
LIMA, Feb 2 (Reuters) - Gramercy Funds Management LLC is threatening to sue Peru for at least $1.3 billion in a dispute over its decades-old land-reform bonds, the company and finance ministry said Tuesday.
U.S.-based Gramercy said in a notice of intent to commence arbitration that Peru had rendered the bonds worthless, which it said amounted to expropriation and a violation of the free trade agreement with the United States.
In 2013, Peru's Constitutional Court ordered Peru to honor the bonds using a method of calculating its current value favored by the government - upsetting bondholders who expected as much as $8 billion.
Gramercy owns about 10,000 of the bonds and said they should be worth at least $1.3 billion instead of the $1.9 million or less it estimates it would get now.
Peru said it was confident it had acted diligently and would defeat a claim.
"These bonds were issued in Peru, in local currency, and are subject to Peruvian law and the jurisdiction of Peruvian courts," the finance ministry said in a statement.
Peru issued the bonds as compensation for land expropriated and redistributed to the poor in the 1970s by leftist dictator Juan Velasco. Previous Peruvian governments resisted honoring them, even during a decade-long mining-boom that allowed gross domestic product to more than double.
Peru's fiscal and current account deficit have since widened as the prices it fetches for its key copper and gold exports have dropped and helped cut economic growth in half.
Last year Gramercy threatened to sue Peru and launched a media campaign to draw attention to what some bondholders call a "second expropriation."
Gramercy said Peruvian officials have repeatedly rejected invitations to negotiate, including last week by Peru's Ambassador to the United States Luis Miguel Castilla, who was finance minister at the time of the 2013 court decision.
The fund said if it could not reach a solution with Peru it would commence arbitration proceedings. (Reporting by Mitra Taj and Marco Aquino; Editing by Bernard Orr and Lisa Shumaker)