If the aim is to find the "the largest possible break up for the input" as you replied, then the algorithm could be fairly straightforward if you use some graph theory. You take the compound word and make a graph with a vertex before and after every letter. You'll have a vertex for each index in the string and one past the end. Next you find all legal words in your dictionary that are substrings of the compound word. Then, for each legal substring, add an edge with weight 1 to the graph connecting the vertex before the first letter in the substring with the vertex after the last letter in the substring. Finally, use a shortest path algorithm to find the path with fewest edges between the first and the last vertex.
The pseudo code is something like this:
parseWords(compoundWord)
# Make the graph
graph = makeGraph()
N = compoundWord.length
for index = 0 to N
graph.addVertex(i)
# Add the edges for each word
for index = 0 to N - 1
for length = 1 to min(N - index, MAX_WORD_LENGTH)
potentialWord = compoundWord.substr(index, length)
if dictionary.isElement(potentialWord)
graph.addEdge(index, index + length, 1)
# Now find a list of edges which define the shortest path
edges = graph.shortestPath(0, N)
# Change these edges back into words.
result = makeList()
for e in edges
result.add(compoundWord.substr(e.start, e.stop - e.start + 1))
return result
I, obviously, haven't tested this pseudo-code, and there may be some off-by-one indexing errors, and there isn't any bug-checking, but the basic idea is there. I did something similar to this in school and it worked pretty well. The edge creation loops are O(M * N), where N is the length of the compound word, and M is the maximum word length in your dictionary or N (whichever is smaller). The shortest path algorithm's runtime will depend on which algorithm you pick. Dijkstra's comes most readily to mind. I think its runtime is O(N^2 * log(N)), since the max edges possible is N^2.
You can use any shortest path algorithm. There are several shortest path algorithms which have their various strengths and weaknesses, but I'm guessing that for your case the difference will not be too significant. If, instead of trying to find the fewest possible words to break up the compound, you wanted to find the most possible, then you give the edges negative weights and try to find the shortest path with an algorithm that allows negative weights.