US banking giant Citigroup has lost a legal battle to recoup about $US500 million it had mistakenly transferred.

New York judge Jesse Furman decided that the recipients of the funds do not have to pay the sum back.

Citigroup said it would appeal against the ruling.

The case garnered attention last August.

Citigroup accidentally repaid in full a loan of around $US900 million ($1.16 billion) from creditors – hedge funds and other professional investors – that it had taken out on behalf of cosmetics manufacturer Revlon.

The repayment was not due until 2023.

The bank said it was trying to make an interest payment of $US7.8 million, blamed human error and asked for a refund.

Since only some of the lenders voluntarily returned the money, it became a legal dispute to recover about $US500 million.

Furman justified his ruling by saying it was irrational to assume that a sophisticated financial institution like Citigroup would make such a big mistake in a transfer.

The deciding question in the legal process was whether lenders should have assumed that the early repayment of credit and interest was unintentional.

A spokeswoman for Citigroup said the bank does not agree with the ruling, believes it is entitled to the money and will continue to pursue full repayment.

Another option that could at least limit the financial damage would be to try to recover the funds from Revlon.

However, that would lead to further legal wrangling.