The U.S. bank, which acts as custodian of some Argentine bonds, has been embroiled in a court battle between the South American country and a group of New York-based hedge funds seeking full payment on their defaulted sovereign bonds.

A potential resolution may have moved closer after a ruling by the U.S. District Court for the Southern District of New York on Friday.

The court has stipulated that it will not restrict Citi from meeting its payment-processing obligations relating to dollar-denominated Argentine bond payments under local law due on March 31 and June 30, the bank said in a statement.

The court also said it will not impede the bank from exiting the Argentine custody business, as it has said it wants to do.

Leftist President Cristina Fernandez's government had threatened to cancel Citibank Argentina's operating license if it refused to process payments to other bond holders.

U.S. District Judge Thomas Griesa in New York ruled that Argentina must settle with the hedge funds seeking full payment on their defaulted sovereign bonds before it continues paying interest to the large majority of investors who accepted significant writedowns on the debt holdings after the country's record default on $100 billion in 2002.

Most investors holding Argentina bonds exchanged them for bonds worth much less, but a group of bondholders rejected the swaps.

These holdouts, including billionaire Paul Singer's Elliott Management LP hedge fund and its NML Capital affiliate, as well as the Aurelius Capital Management hedge fund, have insisted they be paid in full if holders of exchanged bonds are paid.

Commenting on the agreement, a spokesman for NML said, "NML and other creditors reached an agreement with Citibank, according to which Citibank agreed not to appeal the court's determination that the pari passu injunction covers all of Argentina's exchange bonds.

The spokesman added that Griesa had approved the agreement that was "specifically tailored to address the unique circumstances facing Citi Argentina after Citibank announced it was exiting the custody business in Argentina."