MOSCOW/KYIV (Reuters) -- Russia's Gazprom gas export monopoly has said its engineers were starting preparations for a January 1 cut-off of gas to Ukraine that could have a knock-on effect on supplies to Europe.
Russia said it would turn off the taps to Ukraine unless a new contract on gas supplies was signed by midnight on December 31, alarming European states that receive most of their Russian gas from pipelines crossing Ukraine.
Last-ditch talks to resolve a row over gas prices appeared to be deadlocked, and Ukrainian Prime Minister Yulia Tymoshenko canceled a plan to fly to Moscow to join the negotiations.
With less than four hours before the midnight deadline, a switch-off looked increasingly likely. A Gazprom spokesman said he believed there was now only a 3 in 10 chance of reaching a deal in time.
"Today at [7:00 p.m. local time] a special team started working on technical issues of supply cut-off," a Gazprom official told reporters at the company's headquarters in southern Moscow.
Russian Prime Minister Vladimir Putin, who has had fraught relations with Ukraine since a 2004 revolution brought pro-Western leaders to power there, accused Kyiv of planning to block Russian gas supplies to Europe.
At a televised meeting with Russian President Dmitry Medvedev, Putin warned of "serious consequences" for Ukraine if it stops the flow of gas to Europe. Ukraine earlier said it will ensure uninterrupted transit of Russian gas to Europe.
Putin said Gazprom was offering to sell Kyiv gas at $250 per 1,000 cubic meters -- a 40 percent increase on current prices but less than the amount paid by customers in Western Europe.
"Despite that, our Ukrainian partners are refusing to sign these agreements and this contract," Putin said.
Bohdan Sokolovsky, an aide to Ukrainian President Viktor Yushchenko, said the price offered by Moscow was too high, Interfax news agency reported. Yushchenko urged a speedy resolution to the dispute, the aide said.
Gazprom has said if a gas supply contract for 2009 was not signed before January 1, it would turn off gas supplies to Ukraine at 7:00 GMT on New Year's Day.
European states are anxious to avoid a repeat of what happened in January 2006 when, during a similar row, Moscow cut off supplies to Ukraine, causing a brief fall in gas pressure for some European consumers.
Europe depends on Russia for a quarter of its gas supplies. Germany's E.ON and BASF and Italy's ENI are among the biggest customers.
Energy analysts say both Ukraine and European states have sufficient reserves to do without Russian gas for several days, after the mild winter and reduced demand linked to the economic slowdown allowed them to build up stocks.
But both Moscow and Kyiv have much at stake in the dispute. Ukraine's economy is in deep trouble, despite receiving a International Monetary Fund loan, and a cut-off could further damage battered investor confidence.
Russia -- already viewed with suspicion in the West after its war with Georgia in August -- does not want to damage its standing as a reliable supplier of energy to Europe.
Russia denies any political motive behind the row, saying it is purely a business dispute and that it will do everything it can to maintain smooth supplies to Europe.
However, Moscow has been fiercely critical of Kyiv's drive to join the NATO military alliance.
In previous disputes, Russia accused Ukraine of illegally siphoning off gas that was destined for European customers.
This year Ukraine says it has sufficient gas reserves to meet domestic demand, but it has warned that the fall in pressure in the pipeline system caused by a Gazprom cut-off could have a knock-on effect on deliveries to Europe.