By Tatyana Ustinova and Jonathan Stempel

MOSCOW/NEW YORK (Reuters) - Russia's federal customs service said on Thursday it had sued Bank of New York Co. (BK.N: Quote, Profile, Research) and was seeking $22.5 billion in damages related to alleged money laundering in the late 1990s.

From 1996 to 1999, bank employees helped to create a "system through which conditions were made for companies and Russian banks to not make the proper payments, thus inflicting a loss against the Russian Federation," Maxim Smal, a lawyer who said he works on behalf of the Russian agency, said in a telephone interview.

Andrey Strukov, head of the customs service's legal department, said in an e-mail that the Federal Customs Service was filing the lawsuit against the bank for damages against the Russian Federation.

Bank of New York shares fell as much as 4.9 percent early on Thursday before closing down 1.1 percent.

Shares of Mellon Financial Corp. MEL.N, which the bank agreed to buy in December for $16.5 billion, fell as much as 2.2 percent but closed 0.7 percent higher.

The lawsuit follows Bank of New York's agreement in November 2005 to pay $38 million to settle two U.S. criminal investigations, including a probe into an alleged money-laundering conspiracy that investigators said moved billions of dollars through the bank's accounts.

Prosecutors said the bank "admitted its criminal conduct," and agreed to pay $26 million to the government and $12 million to other banks that lost money.

Bank of New York said in a statement on Thursday that it had not seen the Russian agency's complaint, but that any such lawsuit would be "totally without merit, if not frivolous."