Luxembourg said on Tuesday it would seek an out-of-court deal to end a protracted legal row about money UBS clients lost to Bernard Madoff that is damaging the country's reputation as a financial center.

Rich clients lost money after having invested in Luxalpha, a Luxembourg-based fund set up at their request by Swiss bank giant UBS. The fund was holding around $1.4 billion of assets, sources familiar with the issue have told Reuters.

I would encourage all parties involved to sit around a table and look for an extra-judiciary solution, Luxembourg Treasury Minister Luc Frieden told the Reuters Funds Summit.

Frieden said the court proceedings were taking too long. He said he would contact UBS in the coming days.

It is always negative if court cases take a long time, Frieden said.

It would be in the best interest of all parties if rather than having numerous court cases they would sit around a table.

Minority shareholder activist group Deminor is helping clients to recover some of the money lost to investment in products offered by Madoff, a former Nasdaq chairman who has admitted to 11 criminal charges in Wall Street's biggest fraud, which drew in as much as $65 billion over many years.

The legal action is another headache for UBS, which is struggling to restructure after being hit hard by the credit crisis and is also at the center of an high-profile U.S. tax fraud case.

UBS acted as the custodian of the Luxalpha fund and has repeatedly said that it did not recommend to clients any Madoff products and that clients knew what they were investing in.

Luxembourg financial regulator CSSF, which is looking into the case, said the custodian bank had to ensure at all times that the money invested in the products was actually there and has given Switzerland's largest bank three months to make changes to UBS' custodian bank in the wake of Madoff's arrest.

UBS has rejected the calls to reform its Luxembourg operations and said it would defend itself vigorously as it did not believe that the CSSF was correct.

(Editing by Hans Peters)

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