* Threat of another sovereign default pushed into next year
* Decision goes against Argentina, but implementation stayed
By Jorge Otaola and Walter Bianchi
BUENOS AIRES, Aug 23 Argentine markets initially rose on Friday after a U.S. appeals court put a hold on injunctions against the government in its legal battle with "holdout" bond investors, but stock and bond price gains were soon erased as concerns over the case persist.
The South American grains-exporting country lost its appeal of a judge's order requiring it to pay $1.33 billion to bondholders who refused to take part in two debt restructurings.
But the 2nd U.S. Circuit Court of Appeals in New York delayed implementing the decision pending a ruling by the U.S. Supreme Court, sparking a brief market rally in Buenos Aires.
"After the appeals court decision was analyzed, the realization set in that Argentina has only bought itself some time," a local stock broker told Reuters, asking not to be named. "So sellers started showing up to take profits."
The U.S. high court is likely to consider whether to hear the case in the fall. If the justices agree to hear the case, a ruling would be issued by the end of June.
"All this does is extend the fight to next year," said Rodolfo Rossi, an economist and former central bank president.
The MerVal blue-chip stock index ended the day 0.7 percent lower at 3,916.8 points after rising 1.53 percent earlier in the session.
The case still threatens to push Argentina toward a debt default if the country is finally ordered to pay holdouts the 100 cents on the dollar that they are demanding.
President Cristina Fernandez vows never to pay on those terms. She characterizes the holdouts as "vultures" out to profit on her country's catastrophic 2002 bond default.
The holdouts bought their Argentine bonds at steep discounts, refused to restructure the obligations and are demanding repayment at face value.
The international bond market seesawed on news of the appeals court decision, with Argentina's country risk premium initially tightening by 21 basis points and then widening by 43 basis points to 1,066 basis points over comparable U.S. Treasuries, according to JP Morgan's Emerging Markets Bond Index Plus.
The index as a whole was at a much tighter spread of 357 basis points over safe-haven U.S. Treasury paper, showing the market sees Argentina three times as likely as other emerging market countries to default.
If final judgment goes against Argentina and the government nevertheless refuses to pay the holdouts what they want, the courts could block it from paying holders who accepted big writedowns as part of debt restructurings in 2005 and 2010.
Missing interest payments to the holders of restructured bonds would put the country in technical default.
"The appeals court decision means the Argentine government can continue paying bondholders who participated in the restructurings at least until there is a final decision," said Ignacio Labaqui, who analyzes the country for emerging markets consultancy Medley Global Advisors.
The ruling nonetheless marked a potential victory over the long term for holdouts led by NML Capital Ltd, a unit of billionaire hedge fund manager Paul Singer's Elliott Management Corp, and Aurelius Capital Management.
U.S. Circuit Judge Barrington Parker, writing for the three-judge panel, said the court believed "it is equitable for one creditor to receive what it bargained for, and is therefore entitled to, even if other creditors, when receiving what they bargained for, do not receive the same thing."