Moscow/Kiev  - Russian export monopoly Gazprom on Wednesday accused its Ukrainian counterpart of negotiating in bad faith as talks on preventing a gas embargo failed, setting the stage for a new energy crisis in Europe.

Ukrainian and Russian government representatives quit negotiations in Moscow some two hours ahead of a promised New Year's cut-off of gas deliveries by Russian energy giant Gazprom to Ukraine, as punishment for a 2-billion-dollar Ukrainian debt.

Europe receives roughly one-quarter of its natural gas from Russia and more than 80 per cent of those supplies are exported through Ukrainian pipelines.

Both countries were preparing for the worst throughout Wednesday with Ukraine in mid-afternoon formally informing Russia it could not guarantee Russian natural gas supplies onward to European customers via Ukrainian pipelines, if the two countries' negotiators fail to sign a delivery contract.

Gazprom export chief Alexander Medvedev said the Ukrainian warning was unacceptable, and a direct threat to European energy security.

"It is impossible to view the (Ukrainian gas supply warning) letter as anything less than blackmail," Medvedev told journalists in the televised conference. "This puts us in a situation when transit volumes to western Europe are in danger."

The move undercut Ukraine's credibility as a gas transit partner and violated its contracts for shipping on gas supplies to Europe, Medvedev said.

But Ukrainian President Viktor Yushchenko was sticking to his guns with less than six hours left before the deadline, publicly rejecting the latest Russian gas contract offer, and accusing the Kremlin of offering terms unfair to Ukraine and then cynically describing them to European observers as an excellent deal for Kiev.

Russia by Wednesday evening was offering gas at a price of 250 dollars per 1,000 cubic metres, a substantial rise over the current rate of 179 dollars, but well below 300 to
350 dollar rates prevailing in Europe.

The Russian proposal left the price paid by Russia for shipping gas through Ukrainian pipelines unchanged, and so was unacceptable to Kiev, Yushchenko said.

Ukraine during a 2006 Russian natural gas cut-off siphoned some of the Russian gas destined for Europe, causing price spikes as far away as Paris.

The current gas supply agreement between Russia and Ukraine was set to run out at the end of 2008. Ukraine in both 2006 and during the present standoff used Gazprom sensitivity to loss of income from gas sales in Europe, and delays in settling its own debts with Gazprom, as levers to negotiate better terms for Russian gas delivered to Ukraine in the future.

Ukraine's government on Tuesday announced it had transferred 1.5 billion dollars to a middle-man gas trading firm Rosukrenergo to resolve the debt.

Medvedev on Thursday confirmed that the money had reached Rosukrenergo, a Russian-Ukrainian intermediary based in Switzerland, adding he hoped it would soon be fed to Gazprom's accounts. Rosukrenergo is owned 50 per cent by Gazprom and 50 per cent by a consortium of Ukrainian businessmen.

Ukraine's government, led by Prime Minister Yulia Tymoshenko, required state-owned banks, Oshadbank and Ukreksimbank, to loan the funds necessary to cover the debt.

Tymoshenko has criticised the funneling of gas payments through the middleman Rosukrenergo, and called for direct settlements between Gazprom and Ukraine in he future.

Russian negotiators stated repeatedly they will not consider any gas delivery agreement for 2009, until Ukraine settled its bills for 2008.

The money had not arrived in Russia by late Wednesday evening, making a Russian gas cut-off inevitable, starting at 10 am (0700 GMT) January 1, Miller said.

Gazprom claims it is owed more than 1.5 billion dollars for gas exports for November and December, and another 500 million dollars in late fees.

Ukrainian energy officials however were pitching the transfer as a good faith payment to make sure gas supplies to Europe continue uninterrupted. The size of Ukraine's debt to Russia, applicable late fees, and gas delivery terms for 2009 are all issues subject to negotiation, and if necessary should by contract be decided in court, they said.

Gazprom has warned European clients of possible shortages and disruptions to supplies in this, the fourth gas dispute between Moscow and Kiev in as many years.

Ukraine's warning to Gazprom was an upping of the ante, marking the first time the Ukrainians had formally warned that Russia gas volumes to Europe would be siphoned in case of a flow reduction or cut off.

Meanwhile in Brussels, European Union officials said that Putin had telephoned European Commission chief Jose Manuel Barroso to set out Russia's position in its gas row with Ukraine.

Putin "explained the gas-supply problems between Russia and Ukraine and the possible consequences for Europe," a statement released in Brussels said.

Barroso "thanked Putin for the information and wished for a negotiated solution ... (which) would not put the supply of gas to EU clients at risk," the statement said.

Not wanting to go unheard from, Tymoshenko placed a call to Barroso 90 minutes after Putin's to state her country's case. Tymoshenko told Barroso to "inform him about the negotiations over the gas supply to Ukraine and the possible consequences for Europe," a statement released in Brussels said.

Exactly three years ago, Gazprom unexpectedly shut off gas supplies to Ukraine in a similar row, provoking sudden gas shortages in much of the EU.

The scandal severely damaged the images of both Gazprom and Ukraine as a reliable gas supplier and a reliable transit route respectively.

Since the incident, EU attention has focused on finding alternative sources of gas supplies and alternative delivery routes to reduce the bloc's reliance on either side. (dpa)