* Payment of more than 800 mln euros not approved by board
* Kirch for years sought to recoup about 2 bln euros
* Deutsche strikes out-of-court settlement with Loreley (Adds background, Kirch statement sources, shares)
By Philipp Halstrick
FRANKFURT, March 1 (Reuters) - Deutsche Bank AG has rejected a proposal to settle a lawsuit with the family of late media mogul Leo Kirch which blames the bank for the downfall of his business, extending one of Germany's most bitter corporate disputes.
Kirch, who died aged 84 last year, sought for years to recoup about 2 billion euros ($2.7 billion) in damages from Deutsche Bank and former Chairman Rolf Breuer for allegedly causing the collapse of his Kirch Group media empire.
Germany's biggest lender said on Thursday its management board had thoroughly reviewed a proposal for an out-of-court settlement, which sources familiar with the talks told Reuters previously, would have involved a payment of more than 800 million euros.
"Based on this review, which included the consideration of internal and external legal advice, the Board decided without dissent not to accept the settlement proposal," Deutsche Bank said in a statement.
Deutsche Bank declined further comment, leaving it unclear if the lender could be tempted by a renewed out-of-court offer.
A spokesman for the Kirch family said they were unperturbed by Deutsche Bank's statement.
Deutsche Bank has recently sped up its efforts to resolve long-running legal battles before Chief Executive Josef Ackermann hands the reins of Germany's flagship bank to investment banker Anshu Jain and Germany's chief Juergen Fitschen in May.
Sources told Reuters last month that Deutsche Bank representatives and heirs to Kirch had reached an agreement in principle, but the bank's management board needed to approve the deal.
"We are dumbfounded by what appears to be leadership chaos at the bank," the Kirch family spokesman said.
Doubts about an out-of-court arrangement began to grow late last month, with sources familiar with the matter saying the number of people within the bank opposed to the deal was growing.
Deutsche Bank is confident of its position in the case and does not plan to build provisions to cover an indemnity, a financial source familiar with the situation said on Thursday.
Lawyers have said that a large payment to settle the case could expose the bank to a suit by its own shareholders.
The Kirch side appears equally self-assured, however.
"Without a settlement, it will be even more expensive for Deutsche Bank," a source familiar with the Kirch family's thinking said.
The case dates back to a 2002 Bloomberg Television interview, in which Deutsche Bank's then chairman Breuer questioned the creditworthiness of the Kirch group.
Separately, Deutsche Bank said it had struck an out-of-court settlement with Loreley Financing, an investment vehicle used by German bank IKB to invest in securitised packages of debt called collateralised debt obligations.
Germany's biggest lender declined to give financial details of the settlement.
Deutsche Bank created CDOs between 2002 and 2007 containing sub-prime loans which eventually turned sour, resulting in massive losses for investors including Loreley, IKB and IKB's majority shareholder KfW.
Sources familiar with the deal on Thursday said the settlement payment would be significantly lower than the $440 million sought by Loreley, after it bought CDOs shortly before the sub-prime mortgage market collapsed.
Separately, a source close to the bank said the settlement payment was already booked in Deutsche's fourth-quarter results. ($1 = 0.7476 euros) (Additional reporting and writing by Jonathan Gould; Editing by Elaine Hardcastle)