U.S. District Judge Thomas Griesa in New York said since the funds were outside the United States in BNY Mellon's accounts at Argentina's central bank, turnover would not be authorized under the Foreign Sovereign Immunities Act.

"In dealing with what can be subjected to turnover, the FSIA simply does not mention property located outside the United States," Griesa wrote.

The motion was brought largely by various Italian citizens who purchased Argentina's bonds. Representatives for the bank, Argentina and the holdout bondholders seeking the handover did not respond to requests for comment.

The ruling came a week after a U.S. appeals court dismissed Argentina's appeal of an order directing BNY Mellon to hold onto the $539 million, which the country deposited in June for bondholders who participated in two sovereign debt restructurings.

Griesa's decision to block the payment, which he called "illegal," sent Argentina on a course to default in July after no settlement was reached.

The default came as Argentina refused to honor court orders to pay $1.33 billion plus interest to U.S. hedge funds suing for full payment on bonds following its earlier 2002 default.

The hedge funds, led by NML and Aurelius Capital Management, had spurned the country's 2005 and 2010 debt restructurings, which resulted in exchanges for about 92 percent of the country's defaulted debt. Investors who exchanged bonds were paid less than 30 cents on the dollar.

The country's most recent default came after the U.S. Supreme Court declined to hear Argentina's appeal of a ruling that it must pay the holdouts when it paid holders of the exchanged bonds.

(Reporting by Nate Raymond in New York; Editing by Shri Navaratnam)