The Justice Department filed a federal suit over the restructuring of bond insurer Ambac, saying that a state court did not have the power to prevent the federal government from collecting potentially more than $700 million in taxes.

Ambac Financial Group , a failed bond insurer, won state court approval last month that will allow it to overhaul its insurance unit Ambac Assurance Corp.

In the suit, the government sought to stop Ambac's rehabilitation process from going forward, saying that it could make permanent a temporary injunction issued by the state court last fall against the IRS going after the taxes. It wants the court to make clear that the Federal government's efforts to collect these taxes is not blocked by the plan.

The government also seeks to stop the state court from enforcing the injunction in the suit, which was filed on February 9 with Wisconsin District Court,

The suit comes after government tried late last year to move the Ambac Assurance case to federal court. The Wisconsin district court denied that request, which also sought to dissolve the injunction, in January. The government has filed an appeal on that ruling.

Ambac's insurance unit rehabilitation is being overseen by the insurance commissioner in Wisconsin, where it is based.

Meanwhile, Ambac Financial, the parent company, filed for bankruptcy in Manhattan federal bankruptcy court last year, citing concern that the government would try to take back the more than $700 million in tax refunds at issue.

The government, which names the state court, the insurance commissioner and the company in the suit, said it may also seek relief against Wisconsin State Circuit Court of Dane County Judge William Johnston.

The case is in United States of America vs. Wisconsin State Circuit Court for Dane County; Theodore Nickel, Commissioner of Insurance of the State of Wisconsin as Rehabilitator of the Segregated Account of Ambac Assurance Corp.; and Ambac Assurance Corp., US District Court, Western District of Wisconsin.

(Reporting by Caroline Humer; Editing by Tim Dobbyn)