WASHINGTON -- More than $2 billion allegedly held on behalf of Iran in Citigroup Inc. accounts were secretly ordered frozen last year by a federal court in Manhattan, in what appears to be the biggest seizure of Iranian assets abroad since the 1979 Islamic revolution.

The legal order, executed 18 months ago by the U.S. District Court for the Southern District of New York, is under seal and hasn't been made public. The court acted in part because of information provided by the U.S. Treasury Department.

President Barack Obama has pledged to enact new economic sanctions on Iran at year-end if Tehran doesn't respond to international calls for negotiations over its nuclear-fuel program.

The frozen $2 billion stands at the center of an intensifying legal struggle between Luxembourg's Clearstream Banking S.A., the holder of the Citibank account, and the families of hundreds of U.S. Marines killed or injured in a 1983 terrorist attack on a Marine barracks in Beirut, Lebanon.

Clearstream is primarily a clearing house for financial trades and is a wholly owned subsidiary of Germany's Deutsche Boerse AG. Luxembourg's bank secrecy laws have helped it grow into a major European financial center.

There is no indication that Citibank knew the funds may ultimately belong to Iran. U.S. firms that do business with Iran face stiff civil and criminal penalties.

A federal judge in Washington ruled in 2003 that Iran orchestrated the bombing of the Marine barracks and later ordered Tehran to pay the victims' families $2.7 billion in compensation.

Lawyers for the families, backed by information provided by the U.S. Treasury, are arguing that Clearstream is holding Iranian funds at Citibank and are seeking to seize the assets as payment for their clients.

"I was stunned when this money popped up in New York," said Steven Perles, a lawyer representing the victims' families. "I had no idea there was Iranian money of this size flowing through the United States."

Citibank, Clearstream and the Iranian government all declined to comment on the case, and Tehran hasn't made any filings in the matter. The outlines of the dispute, however, appear in judicial filings and in the federal court's docket sheets.

Those documents show that Clearstream has denied it is holding funds for the Iranian government and that the European firm has been fighting to release the $2 billion.

The court initially ordered Citibank in June 2008 to freeze $2.25 billion of Clearstream's accounts, but the company's lawyers were able to get $250 million released the following month, according to court records. Clearstream is represented in the U.S. by White & Case LLP, which declined to comment.

The legal battle over the funds could lead to a trial. A victory for the plaintiffs would mark the largest seizure of Iranian funds since Islamist parties seized power in Tehran from the U.S.-backed Shah in 1979.

That year, the U.S. government froze around $12 billion of Iranian assets in retaliation for the kidnapping of American diplomats and military personnel. While a portion of the funds was returned after the hostages' release, a United Nations body in the Netherlands continues to try and arbitrate the return of the remaining assets, which include bank deposits, gold and real estate.

The legal case concerning Citibank in New York comes as the U.S. government is intensifying efforts to use the global financial system to pressure Iran into giving up its nuclear program and support for international terrorism.

U.S. officials said that the Obama administration has also finished tailoring a new round of economic sanctions on Iran that could be enacted early next year.

The new penalties seek to hobble Tehran's oil and gas industry by blacklisting Iranian energy, insurance and shipping firms.

The U.S. strategy also seeks to target the economic assets of Iran's elite military unit, the Revolutionary Guards Corps, which is believed to oversee the country's nuclear program. U.S. officials said international deliberations over new Iran sanctions could begin at the United Nations Security Council within the next month.

"Inside the U.S. government, the plan is now done," said a senior U.S. official briefed on the sanctions deliberations. "We've put together a plan that's comprehensive and goes after a number of Iran's vulnerabilities."

U.S. Defense Secretary Robert Gates joined with European leaders Friday to warn that Iran risks sanctions soon if it fails to cooperate with the West on its expanding nuclear program.

"I think that you are going to see some significant additional sanctions imposed by the international community," Mr. Gates said. He cautioned that "any military action would only buy some time, maybe two or three years."

Lawyers for the victims of the Beirut bombing said they started looking for Iranian assets to seize after winning the $2.7 billion judgment in 2007. A federal judge in Washington D.C. ruled that Iran's intelligence service, the Ministry of Information and Security, directly oversaw the bombing of the Marine Corps barracks in coordination with the Lebanese militant group, Hezbollah. Before the Sept. 11, 2001, attacks, it was the largest terrorist attack ever inflicted on U.S. citizens; 241 servicemen died.

The lawyers initially looked at targeting assets of global oil companies who did business with Iran, as well as international organizations like the World Bank. But last year, they also subpoenaed the Treasury Department to gain any information that the U.S. government had on Iranian assets inside the U.S.

In June 2008, the Treasury's Office of Foreign Assets Control filed a motion in Washington D.C. federal court, seeking authorization to disclose to the plaintiffs in the terrorism cases information concerning assets being held inside the U.S. in which Iran might have an interest.

Treasury also said in its court filing that its motion needed to be expedited due to "the risk of immediate asset flight."

Two days later, the New York court ordered Citibank to freeze $2.25 billion of Clearstream's accounts in New York.

Damn

Ah hell, what's another war.

Anyone heard of the "Straight of Hormuz"? This will be Iran's first move should this escalate any further and I sure our grand President is ready for the consequences......

Middy....if you think we don't have a plan to keep the Strait of Hormuz open...you are sadly mistaken..

Iraq invaded Kuwait.. We came in and kicked them out.. But didnt really do anything to Iraq at that time.. If we would have finished the job - imagine the time we would have saved.

PC and politics can be thanked for that one.

Todays Kinder, Gentler, and Accepting military and its leaders will have a hard time stopping a blockade.

evidence of this - 3 Navy Seals going up for court marshal for giving a bad guy a fat lip..

Our pussified Govt hand cuffs the wrists of our soldiers and expect them to get a mission done without casualty has become the laughing stock of the world..

Next bank account seizure will be yours. Not too happy about this.

You'd be surprised how safe it is transiting the straights these day. All Iranian movement along that coastline is monitored so closely.

Their only hope is getting a shot off with a CSS-C3 anti-shipping missile, which is picked off pretty easily with our current technology.

Those particular missile sites would be taken out long before they ever even went active anyway.

I'm sure nobody thought about that the last 25 years...

I respect each of your points and it would be foolish not to; however, I ask if they can walk right up to military barrack and blow the I eat poo out of it what is there to stop them from sinking a cargo or tanker ship or two in the straight and stopping all traffic through the passage?? I dont claim to know and would rather see it happen there instead of somewhere here.....

Our arrogance caused us to have a lack of preparations and a false sense of overconfidence. Over the past 25 plus years, we have learned a few lessons. But I'm sure there are more for us to learn and re-learn.

Having planned and executed several strait passages for strike groups, I'm just saying this is one I'm not worried about.