A US appeals court has reversed a $1.68bn judgment against the Central Bank of Iran (CBI), in a case brought by families of US service members killed in the 1983 Beirut Marine barracks bombing.

The decision marks a significant setback for terror victims seeking to collect judgments through US courts against Iran and other designated state sponsors of terrorism and comes just weeks before President-elect Donald Trump is set to take control of the White House in January, where he is expected to levy heavy sanctions on the CBI and Iran’s oil sector in the first days in office.

The 2nd US Circuit Court of Appeals in Manhattan ruled unanimously that the lower court should have addressed state law questions before ruling against the CBI and Luxembourg-based Clearstream Banking, a Deutsche Boerse subsidiary.

The three-judge panel rejected claims that a 2019 federal law, designed to facilitate seizure of Iranian assets held outside the United States, waived the CBIs sovereign immunity.

"The law neither abrogates Bank Markazi's (Central) jurisdictional immunity nor provides an independent grant of subject matter jurisdiction," Circuit Judge Robert Sack wrote, Reuters reported.

The case stems from plaintiffs' efforts to hold Iran accountable for allegedly providing material support for the October 23, 1983 suicide attack that killed 241 US service members in Beirut.

They sought to seize bond proceeds held by Clearstream in a blocked account on Bank Markazi's behalf.

The Iranian central bank claimed immunity under the Foreign Sovereign Immunities Act, which generally protects foreign governments from US court liability. The case has now been returned to US District Judge Loretta Preska in Manhattan to address state law questions in the 11-year-old dispute.

The plaintiffs, who filed the suit in 2013 to partially satisfy a $2.65bn default judgment won against Iran in 2007, claim to hold over $4bn in uncollected judgments against Iran. The case represents one of many challenges facing terror victims seeking to collect judgments against Iran and other US-designated state sponsors of terrorism through US courts.