Russia said last night that talks with Ukraine on the payment of the $2-billion gas supply debt and signing of the new gas supply contract has failed, forcing it to to turn off the gas supply, which could affect supplies to Europe if the standoff continues for long.

Ukraine had to pay the Russian state-owned energy giant Gasprom a total of $2 billion debt on gas supplied last year with an $805 million bill for November, $862 million for December and $450 million in fines for late payment.

Ukraine has said that it has cleared of all its 2008 dues by paying an intermediary firm $1.5 billion but has refused to pay the $450 million fine levied on it for late payment.

Ukraine has also refused to sign a new contract with a hike in gas prices. In the previous contract, Ukraine paid $180 per 1,000 cubic meters of gas, while the new contract more than doubles the charge to $418 per for the same amount of gas.

During negotiations Gazprom then reduced the price to $250 per 1,000 cubic meters of gas, which Ukraine again rejected saying even thism was still too high as energy prices has dropped globally.

Putin has said that the $250 per 1,000 cubic meters of gas was a subsidised rate and a "humanitarian" gesture towards its neighbour since the international market price was $418 per 1,000 cubic meters of gas.

Rejecting the reduced ates, Ukraine  in urn imposed new financial terms asking Gazprom to increase the pipeline supply rates on the routes where the Russia FIRM uses Ukraine's pipelines to supply gas to Europe.

Last week Russian President Dmitry Medvedev warned Europe that it would be forced to cut off gas supplies starting 1 January 2009 if Ukraine did not settle the gas dispute. (See: Gazprom threatens to cut gas supplies to Ukraine)

Gazprom said last night that ''it has no legal grounds to supply gas beyond the customs zone of the Russian Federation given the absence of a signed contract, and from 10:00 am on January 1, 2009 Gazprom will fully, 100 per cent, stop gas deliveries to Ukraine. The entire responsibility for the current situation rests with the Ukrainian side.''

Russian Prime Minister Vladimir Putin, issued a dire warning to Ukraine, appearing on state television along with President Medvedev, saying that Ukraine's relations with Russia will have "quite serious consequences" as Kiev had signed an agreement last year which is in force till 2010 to deliver Russian gas to Europe.

Putin said that Ukraine has threatened to block supplies to Europe and the present government in Ukraine has taken the country to near economic collapse.

"The situation in Ukraine is aggravated by the fact that a fight between different clans is having a negative impact on the economy," Putin said

Medvedev advised the Ukrainian government to make a reasonable decision quickly instead of inviting trouble for its citizens.

The Ukrainian government has said that it has ample reserves of  its own to meet its domestic needs for three months and assured Europe that it would not disrupt the gas supply from its pipeline.

Ukrainaian President Viktor Yushchenko denied Russian talk of his country trying to blackmail Russia and Europe by threatening to cut supplies through its pipeline.

Ukraine is finding it difficult to resolve the gas dispute also due to the animosity between its President Yushchenko and Prime Minister Yulia Tymoshenko. The former friends during the 2004 Orange Revolution are now bitterly opposed to each other and each has accused the other of botching up the gas negotiations with Russia.

Tymoshenko, who is looking to run for the presidency is more amenable to the Russian government and some analysts feel that Russia is taking a hard line to undermine the pro-west Yushchenko.

In October, Tymoshenko had negotiated a gas deal with Russian President, Putin and had said that she would eliminate all the corrupt middlemen who had ties with the President.