Nov 21 (Reuters) - A planned $800 million settlement between Kingate Management, one of the largest investors in Bernard Madoff's fraud, and a court-appointed trustee recouping money for the swindler's victims has broken down, The Wall Street Journal said on Thursday, citing people familiar with the matter.

The breakdown followed Monday's announcement by the U.S. Department of Justice of a plan to exclude Kingate and other "feeder funds" that sent money to Madoff from participating in a separate $2.35 billion Madoff Victim Fund, the newspaper said, citing the people.

According to the newspaper, a settlement between Kingate and Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities LLC, depended on Kingate receiving money from the victim fund, and sharing it with sums that Picard collects.

Picard has not allowed people who invested indirectly with Madoff through third parties such as Kingate to recover for their losses.

Such investors may for the first time recover by going through the victim fund, which is overseen by Richard Breeden, a former U.S. Securities and Exchange Commission chairman.

Picard filed more than 1,000 lawsuits to recover sums linked to Madoff, including a lawsuit against Kingate in 2009.

According to the Journal, Picard and Kingate came close to a settlement earlier this year in which Kingate would have returned about $800 million to the trustee and retained a claim against him.

But the newspaper said that accord assumed that Breeden would follow an approach similar to Picard's, and he has not.

Amanda Remus, a spokeswoman for Picard, said the trustee does not comment on settlement talks. Susheel Kirpalani, a lawyer for Kingate, also declined to comment.

Picard has said he has recovered about $9.5 billion for Madoff's victims, and returned more than half of this sum.