A U.S. judge on Tuesday approved a legal settlement requiring a unit of Banco Santander SA , which fed billions to New York financier Bernard Madoff before his swindle was revealed, to pay $235 million.

The settlement between Santander's Geneva-based hedge fund Optimal Investment Services and court-appointed trustee Irving Picard, who is winding down Madoff's brokerage firm, was announced on May 26 but was subject to court approval.

Judge Burton Lifland of U.S. Bankruptcy Court in Manhattan said he approved the settlement because it would increase recoveries for victims of Madoff's $65 billion worldwide scam. So far, the trustee has recovered $1.225 billion.

The Santander payment represents money withdrawn just before Madoff's fraud was revealed last December. The trustee has been seeking the return of funds from big investors to reimburse other victims of the money manager's fraud.

Madoff, 71, pleaded guilty in March and is in jail awaiting sentencing on June 29.

(Reporting by Grant McCool, editing by Dave Zimmerman)