US Federal Judge Thomas Griesa has held Argentina in contempt of court for its failure to follow a court order to continue to pay 92% of bondholders who restructured after the country's 2001 default.
The judge will announce the penalty at a later date.
Griesa also warned that Argentina must stop efforts to overcome his rulings by making payments locally by replacing Bank of New York Mellon with Banco de la Nacion Fideicomiso as trustee for some of its restructured debt.
Despite the ruling, Argentina plans to deposit an interest payment of at least $200m (£123.2m, €157.7m) with Banco de la Nacion Fideicomiso, Reuters reported, citing a source from the central bank.
The contempt ruling comes after the Argentina Congress passed a bill in September to circumvent Griesa's previous ruling to only pay the 92% of Argentina's restructured bond-holders if holdout hedge funds were paid in full.
Griesa had called such moves "illegal".
The country has been engaged in a long legal battle with hedge funds led by Elliott Management Corp and Aurelius Capital Management LP, which refused to take part in the country's debt restructuring.
Griesa had earlier ruled in favour of the so-called vulture funds, barring Argentina from paying the holders of its restructured debt unless it pays the hedge funds.
However, Argentina organised payment to restructured bondholders via an Argentine bank to avoid paying the hedge funds. Subsequently, the hedge funds asked Griesa to hold Argentina in contempt and fine the country $50,000 (€39,000, £31,000) per day.
The US judicial system has drawn widespread criticism over its inability to settle debt disputes prompting a tough stance against Argentina, which has faced two debt defaults in 13 years.
"Holding Argentina in contempt won't help resolve this situation," said Eric LeCompte, executive director of religious debt relief group Jubilee USA.
"The case highlights the need for a comprehensive bankruptcy process that brings all investors to the table. This is the only way we can have settlements that benefit everyone, not just the special interests of a few."