By Jonathan Stempel

NEW YORK (Reuters) - The trustee recouping money for victims of Bernard Madoff's Ponzi scheme on Wednesday sought court approval to release $1.25 billion from legal reserves, potentially boosting the total payout to $8.22 billion.

Irving Picard, the trustee, said the request was made possible after a federal appeals court in New York ruled on Feb. 20 that victims were not entitled to "time-based" inflation or interest adjustments on their claims.

Nearly three-quarters of the released reserves would be made available for immediate distribution to victims.

The latest payout would be the second largest of six since Madoff's fraud was uncovered in December 2008.

Madoff, 76, is serving a 150-year prison term.

David Sheehan, a lawyer for Picard, said the process might be delayed if claimants in the time-based case make a mid-May deadline to appeal to the U.S. Supreme Court.

If approved at a May 28 hearing, payouts would go to fraud victims who had 1,077 accounts at the former Bernard L. Madoff Investment Securities LLC.

Picard said payouts would average $855,232, and range from $1,082 to $168.5 million. He said it would result in claimants on 1,252 of the 2,216 accounts where he found valid claims being fully paid, including everyone owed $1.13 million or less.

The $1.25 billion is part of a $1.45 billion reserve created under a 2012 court order.

Picard plans to make $904 million available for immediate distribution, hold $345 million for other claims, and keep the other $200 million in reserve for "unknown contingencies."

The trustee has recouped $10.57 billion of the $17.5 billion of principal he estimates that Madoff victims lost.

According to court papers, law firms, consultants and other professionals had through Sept. 30, 2014, billed $1.01 billion of fees and expenses to recoup money for Madoff's victims.

U.S. bankruptcy judges have so far approved payments of more than $601 million, largely for fees, to Picard's law firm Baker & Hostetler.

The firm plans on Thursday to seek approval for $40.6 million of compensation to cover fees and expenses for the four months ending Nov. 30, 2014, a court filing shows.

(This story orrects sixth paragraph to show payout might be delayed if claimants make, not miss, a deadline to appeal separate ruling)

(Reporting by Jonathan Stempel in New York; Editing by Ted Botha and Grant McCool)