(Adds Justice Department comment, Tom Hayes case in UK)
NEW YORK, July 19 (Reuters) - A U.S. appeals court on Wednesday overturned the convictions of two former London traders from the first U.S. criminal trial stemming from the worldwide probe into 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 under the Fifth Amendment had been violated, because testimony they had been compelled to give UK regulators was used at their trial.
Allen and Conti, who worked for Dutch-headquartered Rabobank , were convicted in November 2015 of fraud and conspiracy for trying to rig U.S. dollar and Japanese yen Libor.
They were sentenced to two years and one year in prison, respectively, but remained free during the appeal.
The U.S. Department of Justice declined to comment.
Wednesday's 3-0 decision set back U.S. government efforts to prosecute individuals for financial crimes, long criticized 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.
The UK Criminal Cases Review Commission, which reviews alleged miscarriages of justice, has agreed to examine the 2015 conviction of former star trader Tom Hayes, the first person convicted worldwide of Libor rigging.
Allen's and Conti's appeal challenged testimony from former Rabobank colleague Paul Robson, a cooperating government witness, that they said improperly incorporated their UK testimony.
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.
He 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."
Cabranes also rejected the U.S. argument that excluding compelled testimony would impede increasingly common cross-border prosecutions, or encourage hostile governments to "sabotage" prosecutors by publicizing testimony.
"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; Additional reporting by Kirstin Ridley in London; Editing by Chizu Nomiyama and Jonathan Oatis)