NEW YORK (Reuters) - Creditors suing Argentina over defaulted debt battled with Citigroup Inc <C.N> in a Manhattan federal courtroom on Friday over the bank's request to process a $5 million payment due September 30 on bonds issued under Argentina's local laws.

Karen Wagner, a lawyer for the bank, told U.S. District Judge Thomas Griesa that "the plaintiffs have now consented to us making" the $5 million payment.

But bondholders that did not participate in Argentina's past restructurings and want to be paid in full for their bonds, including Elliott Management's NML Capital Ltd and Aurelius Capital Management, have opposed letting Citigroup make the payment, citing an earlier order by Griesa.

Ted Olson, a lawyer for NML, said allowing the payment would "frustrate any effort at settlement" with Argentina, which has been in default on a variety of bond payments for nearly two months, and encourage the country to evade further court orders.

Citigroup has said it faces regulatory and criminal sanctions by Argentina if it cannot process the interest payment on U.S. dollar-denominated bonds issued under Argentine law following the country's 2002 default.

(Reporting by Nate Raymond and Joseph Ax in New York; Editing by Dan Grebler)