Russia and Ukraine struck a face-saving deal yesterday to end a bitter dispute over gas prices that disrupted supplies to Europe and cast doubt on Moscow's reliability as a supplier.

The European Union welcomed the five-year pact but still held talks on energy security after the sudden reduction earlier this week of Russian deliveries through Ukrainian pipelines, which supply a quarter of the continent's needs.

The accord calmed tensions between the former Soviet neighbours triggered by the Russian state gas monopoly Gazprom's decision to cut deliveries to Ukraine on January 1-2 to press a demand for a fourfold hike in prices.

Russian President Vladimir Putin, accused in the West of using the dispute as a political tool against Ukraine just as Moscow assumes the annual presidency of the G8 nations, said the agreement would guarantee gas supplies to Europe.

"This creates stable conditions for Russian gas supply to European customers for many years ahead," Mr Putin told Gazprom chief executive Alexei Miller at a meeting.

Under the deal, Ukraine will pay on average $95 per 1,000 cubic metres for gas imports from Russia and the Central Asian states of Turkmenistan and Kazakhstan - up from about $50 now. But Russia was able to exploit its strategic position at the hub of the Soviet gas pipeline network to charge a premium price of $230. It will sell less gas directly to Ukraine, freeing up more for export to European markets.

"Traditionally Central Asian gas is cheaper, so there won't be any shock for the Ukrainian economy," Mr Miller told Mr Putin.

Ukraine's pro-Western president, Viktor Yushchenko, also put a positive spin on the deal, saying it would wean his country off Soviet-style barter and help build a modern market economy. "Ukraine's economy is completely ready for new market conditions," Mr Yushchenko said in a statement.