FRANKFURT - Deutsche Bank has proposed a settlement to shareholders who sued Germany's largest bank for underpaying them for the acquisition of Postbank but the offer is not good enough, a lawyer for the plaintiffs said on Friday.

The lawyer, Jan Bayer, rejected the bank's proposal as a "crackhead" offer that is "dead on arrival".

Any settlement would mark a significant development in years-long litigation that has cast a shadow over Deutsche Bank and recently forced it to set aside 1.3 billion euros ($1.43 billion) ahead of any possible payout.

"As we've stated in the past, we are in settlement discussions with various groups of plaintiffs within the several Postbank takeover proceedings," Deutsche Bank said in a statement in response to a Reuters request for comment. It said it would not comment specifically on the latest developments in the talks.

A key element of the settlement is an offer to pay the shareholders 36.50 euros per Postbank share.

Deutsche began its acquisition of Postbank, with its millions of clients and roots in the country's postal system, during the 2008 global financial crisis.

The bank at the time was seeking to broaden its reach in Germany with a steady income stream after years of rapid international expansion, but instead, Postbank became a source of consumer complaints, regulatory scrutiny and the costly lawsuits.

For years, the suits claiming Deutsche Bank had underpaid former shareholders for the Postbank acquisition bounced around in the courts.

The case took a dramatic turn in April, when a court in Cologne sounded sympathetic to the former shareholders' case, prompting Deutsche to make the unexpected provision to offset any possible claims.

In the aftermath, Deutsche scrapped plans to reward investors and buy back its own shares and posted a quarterly loss, breaking a profit streak of 15 consecutive quarters.

The Cologne court is due to hold a hearing in the case next Wednesday and possibly make a ruling. It has urged Deutsche and the plaintiffs to work on a settlement. ($1 = 0.9105 euros)

(Reporting by Tom Sims, Editing by Elisa Martinuzzi, Rachel More, Miranda Murray, Jane Merriman and Susan Fenton)