Citigroup is to counter-sue Italian dairy firm Parmalat for damages it says it suffered as a result of the latter's spectacular collapse in 2003.
Citigroup is suing Parmalat, led by chief executive Enrico Bondi
The US bank said it was a victim of fraud at Parmalat, which went bankrupt after a 14bn euro ($18bn) scandal.
Parmalat's administrators are suing Citigroup, accusing it of continuing to do business with Parmalat despite knowing the firm was in grave trouble.
Citigroup, however, said Parmalat lied about its true financial position.
On Thursday, Italian prosecutors accused Citigroup and three other companies of helping Parmalat mislead investors, a charge Citigroup denies.
The world's largest financial services group is now suing Enrico Bondi - initially the government-appointed administrator of Parmalat and now its chief executive - for compensation stemming from Parmalat's insolvency.
"Citigroup is a victim of Parmalat's fraud and has lost more than 500 million euros as a result," William Mills, chief executive of Citigroup's corporate and investment bank in Europe, said in a statement.
Mr Bondi recently became chief executive of Parmalat - which is hoping to relist on the stock market after undergoing a major restructuring.
In its court filing, Citigroup alleged that Parmalat had misled its executives by forging documents, registering fake sales and "inventing" assets which did not exist.
"Citigroup had nothing to do with these frauds and was not aware of them," Mr Mills stressed.
"If Citigroup had known the truth, it would not have done business with Parmalat."
Parmalat declined to comment on the legal action.
Its administrators launched a $10bn lawsuit against Citigroup, Bank of America and former auditors Deloitte & Touche and Grant Thornton last year, claiming they shared responsibility for the company's collapse.
A US court last month rejected Citigroup's request to have the lawsuit dismissed.
Parmalat collapsed after a 14bn euro hole was found in its accounts, one of Europe's largest financial scandals.
According to Reuters, US regulators have told Citigroup it should not make any major acquisitions until it has addressed key regulatory and internal compliance issues.
"It (is) important that management's attention not be diverted from these efforts by the demands that mergers and acquisitions place on management resources," the Federal Reserve said in a statement earlier this week.
Aside from its involvement with Parmalat, Citigroup is facing a number of other problems in the US and overseas.
US federal prosecutors are looking into the activities of Citigroup's mutual funds unit while its Japanese private banking business was shut last year after its lending and anti-fraud practices were criticised.
Citigroup bosses launched a "five-point plan" last month designed to tighten internal management controls and improve training.