President Cristina Fernandez's leftist government is in a race against the clock to make a $200 million (123.05 million pound) coupon payment due on Sept. 30 to prevent the default spreading across bond series, which could raise the risk of investors calling for immediate payment on the principal value of their bonds.

But she needs to route the funds through channels beyond the reach of the U.S. judge who ruled that Argentina must settle a legal fight with a group of New York hedge funds over unpaid debt from a massive 2002 default before servicing its performing debt.

After an overnight debate, the legislature's lower house passed the bill under which the government could make payments on an estimated $29 billion in foreign-held bonds either in Argentina or elsewhere out of U.S. jurisdiction.

It also encourages investors to move their Argentine debt from the United States and other foreign jurisdictions to either Argentina or France via an exchange of debt.

Fernandez later on Thursday signed the bill into law, asserting it would enable Argentina to pay all its creditors.

Government allies brushed aside opposition arguments that the Sovereign Payment Law would not get off the ground because it failed to meet legal requirements of the original bond contracts.

"We have a coupon payment on Sept. 30. We have to fulfil that payment," said Juliana Di Tullio, leader of the Front for Victory ruling coalition.

Argentina fell into its second default in 12 years after U.S. District Judge Thomas Griesa barred trustee Bank of New York Mellon from transferring a June interest payment to bondholders.

Griesa has called the government's new debt plan illegal but has stopped short of placing Argentina in contempt.

CONTAINING THE DEFAULT

Economy Minister Axel Kicillof acknowledged this week that creditors had a low appetite for the plan, which removes BONY Mellon as the conduit for payments and proposes Nacion Fideicomisos, a unit of state-owned Banco Nacion, as a replacement.

Fernandez and Kicillof insist Argentina is not in default and will continue to pay its debt obligations. They accuse Griesa of overstepping his bounds and interfering in the affairs of a sovereign nation.

"The government will at least send the signal they want," said Alejo Costa, chief strategist at local investment bank Puente. "In their view, they're doing what they can to make the payment.

If Argentina fails to complete payment to holders of its foreign currency-denominated Par bonds on Sept. 30, the risk of creditors declaring their bonds' principal value and interest due immediately - known as an acceleration - will rise.

Fixed-income traders say the Par series is the most likely to be accelerated because its price offers the most upside, but say any investor tempted to make the demand will likely wait to see if payment is made first.

Congress passed the bill 134-99 early Thursday morning after a marathon debate that started Wednesday afternoon. The Senate had already approved the proposal last week.

Opposition lawmakers said the bill will fail to resolve the legal imbroglio because any trustee must have a Corporate Trust Office in New York's Manhattan borough and be conducting business under the laws of the United States.

Nacion Fideicomisos' legal address is in Buenos Aires and its website shows no indication of a presence in New York.

"The bill does not fit with the bond contracts," said Mario Negri, head of the opposition Radical civic Union party.

(Writing by Hugh Bronstein and Richard Lough; Editing by W Simon, Kieran Murray and Ken Wills)

By Alejandro Lifschitz and Sarah Marsh