The source said Elliott had subpoenaed US banker Chase Manhattan Corp. in a legal feud that delayed Peru's payment of $80 million interest on its Brady bonds earlier this month.

Peru's economy ministry said in a written statement that Elliott had "served orders on the Fiscal Agent, and on the Depository Trust Company and Euroclear in an attempt to block payments through the Fiscal Agent and these clearing houses."

It did not name the fiscal agent as Chase Manhattan, the source said.The legal move cranked up the pressure with nine days to go before an October 7 deadline for the $80 million payment.

If Peru does not settle the outstanding interest on its $4.87 billion Brady bonds, it will be officially declared in default - a disaster scenario that could hurt Peru's ability to raise foreign capital, analysts say.

Investor confidence in the Andean country has already plummeted, depressing bond, stock and currency prices, since a political crisis developed two weeks ago that spurred President Alberto Fujimori to call for new elections and sparked coup fears.

Peru, meanwhile, has planned a legal countermove to try to make the interest payment without Elliott getting its hands on it.

The government source said Morgan Guaranty Trust, a subsidiary of J.P. Morgan & Co. representing Euroclear, and Chase Manhattan, the fiscal agent, would meet in a New York court on Friday to try to resolve the dispute.

There was no immediate comment from Chase Manhattan or Elliott. Pablo Secada, senior economist at Banco Santander in Lima, said that court appointment - essentially a legal bid to circumvent payment to Elliott - was fixed for midday. "I think they will try to pay (the interest) without paying Elliott," he said, adding that he thought Peru could muster $80 million from funds it has deposited with Euroclear and Chase. "Let's hope they find a solution because time is running out," he added. Peru's portion of the J.P. Morgan Emerging Markets Bond Index Plus opened 3.5 percent lower, but later recovered to stand 1.5 percent down.

Peru PDI bonds fell 13 percent to 61 points from a year's high touched on Aug. 13 before recovering to close at 61.375 points. Peruvian spreads widened 29 points to 699 points over U.S. Treasuries - bucking a market trend. Options dwindle Peru missed the interest payment not because it lacks the money, but because a New York appeals court ruled that Elliott, which did not take part in a Brady plan that Peru agreed with its creditors in 1997, may legally seize $55 million of the payment when it is released by the government. "Peru wishes to confirm its commitment to meet its obligations to its Brady Bond holders ... Peru is vigorously pursuing its legal positions in this respect before the courts and is committed to the removal of any impediment to the payment of its interest due," the ministry's statement said. But analysts said Peru's options were dwindling.

"Peru doesn't have time to manoeuvre. They've got a week. it looks like they'll have to just pay them," said Siobhan Manning, emerging market strategist at Caboto in New York. Secada said Peru held unsuccessful talks with Elliott two weeks ago. It then tried to pay using a different clearing house, Clearstream, but that also foundered. "The problem is the government has reacted very late and doors are closing one by one," he said. But Secada expected the government to exhaust every avenue before paying Elliott because such a move could open the floodgates to other claims totalling some $100 million from other lenders who did not take part in the 1997 Brady scheme. Some fund managers say Elliott is right to hold out and that the Brady deal was too generous toward Peru, which asked debt holders to forgive 45 percent of what was owed. Secada said Elliott reckoned Peru would have to pay it the $55 million it says it is owed, plus legal fees, totalling some $66 million. Brady bonds are refinanced debt, usuallybacked by U.S. Treasury bonds, that emerging market countries used to repackage bad loans.

They are named after former U.S. Treasury Secretary Nicholas Brady, who proposed the scheme.