US District Judge Thomas Griesa ordered Bank of New York Mellon to hold on to money deposited by Argentina after the country formally demanded the intermediary bank to pay the amount to its restructured bondholders.
Argentina had deposited $539m (£320m, €403m) with the New York bank to pay its creditors, despite Griesa's earlier order to block the country's payments to restructured bondholders unless it pays to holdout creditors in full.
The country has been engaged in a long legal battle with hedge funds led by Elliott Management and Aurelius, which refused to take part in the country's debt restructuring. About 92% of the country's creditors agreed to swap debts and accept less money.
In a major blow to the government, Griesa earlier gave a ruling that bars Argentina from paying the holders of its restructured debt unless it pays the hedge funds. He has also blocked Argentina's coupon payment to restructured bondholders through Bank of New York Mellon.
As a result, the country could not make its payments to bondholders due on 30 June, and after a month, it fell into its second default in 13 years as its attempt to make a settlement with holdout funds failed.
Argentina earlier ordered Bank of New York Mellon– the intermediary between the country and bondholders – make the payouts despite Griesa's order.
"The Republic will seek to hold BNY Mellon liable for any damages the Republic has suffered and may suffer as a result of BNY Mellon's acts and omissions," Reuters quoted as saying a government letter to the bank on 6 August.
"BNY Mellon has placed its interests, and those of the plaintiffs ... over those of the Exchange Bondholders, in violation of BNY's duties as Trustee," the letter said.
However, Griesa blocked the bank again from the move, saying it was illegal for Argentina to deposit money.
"Argentina will take no steps to interfere with BNY's retention of the funds," Griesa's order said.
The development comes as another setback for Argentina, and the world is closely looking at the Republic for its next move.
The default comes as a major blow for the Argentine economy, which is already in recession. It would damage its reputation further in the international capital market, as it looks to global financiers to repair its economy.