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International Monetary Fund Managing Director Christine Lagarde withdrew a proposal to back Argentina in the country’s legal battle over its defaulted debt, citing opposition from the U.S., the fund’s largest shareholder.

The decision comes three days after Lagarde said she’d recommend that the IMF board file its first-ever friend-of-the-court brief to the U.S Supreme Court in support of Argentina’s request for a review of a lower court ruling. The case involves holdout creditors from the nation’s $95 billion default in 2001.

“The managing director’s recommendation was premised on U.S. support, as it would not be appropriate for the IMF to file this...

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