(Adds details from decision, comments)
NEW YORK, July 19 (Reuters) - A U.S. appeals court on Wednesday overturned the convictions of two former London traders from the Department of Justice's first criminal trial stemming from the worldwide probe into the manipulation of the Libor interest rate benchmark.
The 2nd U.S. Circuit Court of Appeals in New York said Anthony Allen's and Anthony Conti's constitutional right against self-incrimination had been violated because testimony they had been compelled to give UK regulators was used at their trial.
Allen and Conti had worked for the Dutch bank Rabobank , and been sentenced to two years and one year in prison, respectively, following their November 2015 convictions. Both were free during the appeal.
The Justice Department did not immediately respond to requests for comment.
Wednesday's 3-0 decision represented a setback for U.S. government efforts to prosecute individuals for financial crimes, long a target of criticism by investors and politicians who believe more people deserve punishment.
Banks use Libor, or the London Interbank Offered Rate, to set rates on hundreds of trillions of dollars of mortgages, credit cards and other loans.
Several, including Rabobank, have paid roughly $9 billion to resolve Libor-rigging probes worldwide.
Allen and Conti were convicted on fraud and conspiracy charges for conspiring to rig U.S. dollar and Japanese yen Libor.
Their appeal challenged the admission of testimony from former Rabobank colleague Paul Robson, a cooperating government witness, that the defendants said incorporated their testimony from the United Kingdom.
In a 78-page decision, Circuit Judge Jose Cabranes agreed that Robson's testimony was "tainted" because his review of the compelled testimony colored his own.
It also said that because Robson provided "the only first-hand eyewitness account" undermining the main argument for acquittal, admitting his testimony was not harmless.
"Compelled testimony cannot be used to secure a conviction in an American court," Cabranes wrote, "even when the testimony was compelled by a foreign government in full accordance with its own law."
Noting that cross-border prosecutions have become "much more common," Cabranes also rejected the U.S. argument that excluding compelled testimony would impede them, or even encourage hostile governments to "sabotage" prosecutors by publicizing it.
"Today's decision is a tremendous relief for Tony Allen and his family, who now look forward to putting this stressful chapter of their lives behind them," Allen's lawyer Michael Schachter said.
Conti's lawyer, Tor Ekeland, said his client "is obviously very pleased with the decision. This case should never have been brought in the United States at all. The cloud is gone."
The case is U.S. v. Allen et al, 2nd U.S. Circuit Court of Appeals, Nos. 16-898, 16-939. (Reporting by Jonathan Stempel in New York; Editing by Chizu Nomiyama and Jonathan Oatis)