Sept. 25 (Bloomberg) -- Citigroup Inc. filed a federal lawsuit against Morgan Stanley, claiming its rival failed to pay $245 million due under a credit default swap agreement.

The breach-of-contract lawsuit was filed today in Manhattan federal court and seeks unspecified damages.

Citigroup’s Citibank unit says it entered into the swap with Morgan Stanley in 2006 to protect the bank against losses from a revolving credit line that Citigroup provided to an entity known as Capmark VI. After Capmark defaulted last year, owing Citibank $366 million, Morgan Stanley refused to pay $245 million due under the swap, the lawsuit says.

Morgan Stanley said in a statement that the lawsuit is “without merit” and that it will “fully defend” itself.

The case is Citibank v. Morgan Stanley, 09-cv-8197, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Glovin in U.S. District Court in Manhattan at 2587 or dglovin@bloomberg.net.

Last Updated: September 25, 2009 18:04 EDT