Prosecutors say that besieged money manager Bernard Madoff needs to be sent to jail because he cannot be trusted under any set of bail conditions.

But Madoff won the latest round in his fight with prosecutors over his bail package Wednesday as a judge ruled he can remain free, brushing aside the government's arguments.

The judge ruled prosecutors did not make a compelling argument that Madoff is a danger to the community or a flight risk ... the two considerations in deciding whether to grant bail.

Prosecutors made the argument Wednesday as Madoff appeared in court as part of the ongoing fight over his bail package.

US$1 million in gifts

The government believes he should be jailed for sending more than US$1 million in jewellery and gifts to family and friends over the holidays.

But the defence said the government was using "inflammatory rhetoric and hyperbole" to make a flimsy argument. They said the gifts were an innocent mistake.

Metal barricades held back a large group of photographers.

Madoff did not speak or show any emotion during the hearing, although he privately conferred with his lawyers on a couple occasions.

He left the courthouse and returned to his US$7 million Upper East Side penthouse, where he has been under house arrest and under the watch of armed guards around the clock.

Outgoing mail searched

His outgoing mail is also being searched to ensure he does not try to pass along any assets that could be used to reimburse burned investors.

Defence lawyer Ira Sorkin told the judge that such extreme restrictions make it "close to impossible to dispose of anything valuable".

"I think the chances of Mr Madoff fleeing at this point are as close to nil as you can get," he said.

Prosecutor Marc Litt said the gifts are further proof that Madoff "cannot be trusted under any set of conditions short of detention".

Investors who lost billions to Madoff are furious that he has been allowed to remain free on bail while being accused of such a sweeping fraud.

- AP