BUENOS AIRES (Reuters) - Citigroup Inc has been authorized by a U.S. judge to process two Argentine debt payments, the bank said, which could ease tensions between the bank and the default-hit nation.

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.

U.S. District Judge Thomas Griesa had ruled that the hedge funds must be paid in full before any payments to the large majority of investors who accepted significant writedowns on their debt holdings.

The Argentine government, meanwhile, threatened to cancel Citibank Argentina’s operating license if it refused to process payments to other bond holders, leaving Citi in limbo with a plan to exit the custodian operation.

However, a potential resolution may have moved closer after a ruling by the Southern District Court 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 due on March 31 and June 30, the bank said in a statement.

(Reporting by Nicolas Misculin; Writing by Anthony Esposito; Editing by David Goodman)