NEW YORK (Reuters) - A U.S. appeals court on Wednesday set aside a judge's ruling that bondholders had valid claims against Venezuela's state-run oil company related to its U.S. refiner Citgo, and directed the judge to apply Venezuela law in assessing the claims.

The decision by the 2nd U.S. Circuit Court of Appeals in Manhattan could provide a boost to opponents of Venezuelan President Nicolas Maduro, who have since 2019 controlled some of the Petroleos de Venezuela's (PDVSA) overseas assets.

U.S. District Judge Katherine Polk Failla in Manhattan had applied New York law in October 2020 when she authorized PDVSA bondholders to seize a 50.1% stake in Citgo, a PDVSA subsidiary that had been pledged as collateral for the bonds.

Failla also entered a $1.68 billion judgment against PDVSA, declaring it in default.

The bonds had been issued under Maduro, but opponents said the opposition-controlled National Assembly never approved using Citgo as collateral.

In Wednesday's decision, the 2nd Circuit said that while it could decide questions of foreign law, Failla was in a better position because she had reviewed materials from the parties and expert witnesses.

Venezuela's opposition wanted the dispute resolved under their country's law.

Lawyers for PDVSA and for the bondholders' respective trustee and collateral agent, MUFG Union Bank and GLAS Americas, did not immediately respond to requests for comment.

Citgo is considered Venezuela's most prized asset outside the country.

Based in Houston, Citgo operates three refineries and a network of pipelines and terminals, and supplies thousands of Citgo-branded gas stations.

In October 2022, the 2nd Circuit had asked New York's highest court for guidance on whether Venezuelan or New York law governed the bond dispute. The state court decided in February that Venezuelan law applied.

The case is Petroleos de Venezuela SA et al v MUFG Union Bank NA et al, 2nd U.S. Circuit Court of Appeals, Nos. 20-3858, 20-4127.