Private equity firm Terra Firma sued Citigroup Inc, accusing the bank of fraud in connection with Terra Firma's purchase of music business EMI Group in 2007, court documents filed on Friday in New York showed.

Terra Firma accuses Citigroup of driving up EMI's price by misrepresenting that there was another interested bidder for the company, the lawsuit said.

Terra Firma bought EMI at the height of the buyout boom in 2007 in a 2.5 billion-pound deal, with Citi serving as adviser, lender and broker to EMI and sole financier to Terra Firma, the lawsuit said.

Because of Citi's misrepresentations, Terra Firma paid a fraudulently inflated price for EMI, the equity it invested and the debt it incurred, the suit said.

Had the private equity firm discovered the misrepresentations earlier, it would not have bid for EMI, the suit said.

The complaint also alleges that Citigroup undermined Terra Firma's ability to manage EMI as part of a plan to take control of the company and sell it to Warner Music Group.

Terra Firma said it sued to recover its lost equity of billions of dollars and to demand punitive damages from Citi.

We believe this suit is without merit and we will defend ourselves vigorously, a Citigroup spokeswoman said in a statement.

The lawsuit is Terra Firma Investments Ltd vs. Citigroup Inc, Case No. 603737/2009, Supreme Court of the State of New York.

(Reporting by Franklin Paul, additional reporting by Dan Wilchins and Gina Keating) (Reporting by Gina Keating)