An Austrian art gallery has announced plans to auction a valuable Egon Schiele work in order to settle its debt from a lengthy legal battle over another of the artist's works which was looted from its Jewish owner by the Nazis.

In July the Leopold Museum, home of the world's most extensive Schiele collection, agreed to pay more than £12 million compensation to the descendants of Lea Bondi Jaray for the 1912 work Portrait of Wally.

To fund the payout, the museum said another of Schiele's works in its collection, the 1914 painting Houses with colorful laundry (Suburb II), would be sold at Sotheby's next month.

Ms Jaray, a Viennese Jew who died in 1969, maintained that the painting had been stolen from her by a Nazi agent in the run-up to the Holocaust. After the war it went on display at the Leopold Museum but in 1999 was loaned to New York's Museum of Modern Art.

It was seized by US federal prosecutors over allegations it was stolen, prompting a 13 years of wrangling over its ownership.

In recent years there have been a number of legal claims for the restitution of artwork, looted during the Holocaust, including paintings by Matisse and Klimt.