Citigroup has struck a deal with the European arm of collapsed investment bank Lehman Brothers to release over $2.5 billion worth of assets held in its custody business.

The settlement, negotiated with the administrators of Lehman's European estate PriceWaterhouseCoopers (PWC), means these assets can be added to the pool of what will eventually make its way back to creditors and returned to clients.

Citi will immediately begin to transfer Lehman Brothers International (Europe), or LBIE's custody assets, PWC said.

The deal also means Citi and LBIE will release each other from all claims and liabilities, PWC added.

This is by far the largest single deal we have undertaken and easily the most complex to negotiate and then structure, given the sheer scale of the legacy relationship between Citigroup and LBIE, said Paul Copley, a restructuring partner at PWC.

Citi has held onto LBIE's custody assets since Lehman Brothers filed for bankruptcy in September 2008, while it assessed its exposure to the Europe part of the business and other entities globally, the two parties said.

Before Lehman's collapse, the firm had entered into a whole series of stock lending, trading and derivatives transactions with Citi, which also acted as an agent for third parties and was a custodian for LBIE in various countries.

Under the settlement Citi will be paid custodian fees, to reflect the complexity of the Lehman estate and the custody positions, PWC said.

We have worked closely with the administrators of LBIE and their team for many months to ensure that the arrangements between Citigroup and LBIE were resolved amicably and in a manner which fairly reflected the interests of both parties, Citi said in a statement.

Lehman's demise remains the biggest bankruptcy filing in U.S. history, and negotiations over how creditors will be paid out are still raging.

The broader U.S. estate said on Wednesday that it now had support from creditors for a reorganization plan, bringing it one step closer to distributing some money back to lenders.

(Reporting by Sudip Kar-Gupta and Sarah White; Editing by Will Waterman and Elaine Hardcastle)