A group of international banks had appeared to be nearing a deal to buy a chunk of the debt held by holdout creditors whose legal battle against Argentina tipped Latin America's No. 3 economy into default on July 31.
But holdout fund Aurelius Capital Ltd said on Wednesday there was "no realistic prospect" of a private solution, dealing a heft blow to market optimism Argentina's second default in little over a decade could be swiftly cured.
Argentine bonds extended losses in local over-the-counter trading. The dollar-denominated Par bond slumped 4 percent to a bid price of 48.4, while the dollar-denominated Discount bond shed 1.7 percent to end at 82.55.
"Today we are in the hands of an international financial power comprised of small, voracious interests that form a real international mafia," Argentine Cabinet Chief Jorge Capitanich, told reporters.
Although Argentine bond prices remained way off prices typical of distressed debt, the sharp falls pointed to fading confidence on Wall Street of a quick end to the country's latest debt saga.
Talks between Citigroup, Deutsche Bank, HSBC and JP Morgan appeared to collapse over disagreements over the price the banks would pay and the absence of a guarantee from the government it would honor payments on them, sources told Thomson Reuters IFR.
IFR also reported that owning just $25 million of bonds may be enough to trigger a demand for the accelerated payment of restructured bonds worth up to $30 billion.
Creditors representing 25 percent of a bond series' nominal value can demand the principal value and interest on a bond series be immediately due, a move known as acceleration.
The dollar-denominated Par series maturing in 2038, on which the sovereign has just $95.3m outstanding, has been the focus of investor attention, IFR said.
Daniel Kerner, director of Latin America and Eurasia Group, said the acceleration scenario was "looking increasingly likely".
Argentina's peso fell 0.5 percent on Thursday to hit a new all-time low of 13.17 per dollar on the informal market, known as the Blue. Tight capital controls mean Argentines are often forced to resort to the black market when they cannot get hold of greenbacks through official channels.
The country's latest debt crisis stems from its default on nearly $100 billion in sovereign bonds 12 years ago and is blocking its return to the international bond market.
Holdout funds led NML Capital Ltd and Aurelius bought Argentine bonds at a discount between 2001-2008 and have pressed their demand for payment of 100 cents on the dollar.
The lead attorney for NML, Robert Cohen, said on Thursday the firm could begin scouring the Nevada desert for Argentine money, after a Nevada court on Aug. 11 compelled representatives of 123 companies registered in the state to comply with NML's searches.
Cohen said the shell companies were allegedly hiding $65 million in embezzled Argentine assets and were "just the tip of a very large iceberg".
He said NML is owed just under $3 billion by Argentina when taking into account all of the cases it has won against the Latin American nation in the U.S. courts stemming from the 2002 default.
There was no immediate reaction from the Argentine government.