Russia and Ukraine reach tentative gas deal in tough Milan talksLEA

(Reuters) - Russia and Ukraine made progress on Friday towards resolving a dispute over gas supplies in time for winter, but European leaders said Moscow still had to do much more to prop up a fragile ceasefire and end fighting in eastern Ukraine.

The mooted deal could re-open Russian gas to Ukraine cut off since June, and ensure supply to European buyers further west before demand surges in the cold months and stocks run down. It came as something of a surprise after talks in Milan that the Kremlin said were "full of misunderstandings and disagreements".

Russia's Vladimir Putin told reporters that a deal ensuring gas supplies "at least for the winter" had been reached after a final one-on-one meeting with Ukraine's Petro Poroshenko, which followed talks attended by European leaders.

"We agreed on all the parameters of this deal," Putin said, but he urged European countries to help Ukraine meet a debt for gas, which he said stood at $4.5 billion.

The agreement followed a hectic series of meetings on the margins of a summit between Asian and European leaders in Milan at which Europeans showed no signs of agreeing to lift sanctions against Moscow imposed over the Ukraine crisis.

There was some progress on the issue of monitoring the Ukraine-Russian border and the so-called demarcation line separating pro-Russia militias and Ukrainian forces. Italy, Ukraine and Russia agreed to join France and Germany in providing surveillance drones for the Organisation for Security and Cooperation in Europe, which is overseeing a ceasefire.

However an overall solution to a crisis which has revived memories of the Cold War still appeared remote, with key issues open including the question of local elections in breakaway regions of eastern Ukraine. And the meetings demonstrated the bitterness of relations between Putin and European leaders, above all Germany's Chancellor Angela Merkel.

"I cannot see a breakthrough here at all so far," said Merkel after one meeting. "We will continue to talk. There was progress on some details, but the main issue is continued violations of the territorial integrity of Ukraine."

Kiev and its Western backers accuse Moscow of aiding a separatist revolt in Ukraine by providing troops and arms. Russia denies direct involvement but says it has a right to defend the interests of Russian speakers.

Fighting has largely died down under a ceasefire agreed last month, but Western countries say Moscow must take further steps to reassure Kiev if it wants sanctions to be lifted.

Even as the fighting has taken place, Russia and Ukraine have been locked in a dispute over prices Kiev should pay for Russian gas. Russia, seeking higher prices and accusing Kiev of running up debt, cut off supplies to Ukraine in June. This has sparked fears that the Russian gas that transits Ukraine to Europe could also be disrupted when demand goes up this winter.

EU officials said the gas talks would continue in Brussels next week. Poroshenko told reporters he hoped the accord reached on Friday could be firmed up in time for the meeting.

Underlining the tense situation, artillery fire could be heard in Donetsk, the eastern city that is the main stronghold of pro-Russian separatists fighting for a split from Kiev.

GLOOM

Alexey Miller, the head of Russian gas giant Gazprom, who met the head of Ukrainian energy group Naftogaz earlier in the day, said that for supplies to resume, Ukraine would have to agree to Russia's conditions. "If these conditions are not agreed, then the present regime will apply," he said.

Clearly sympathetic with Kiev, European leaders lined up to tell Russia to ensure full implementation of the ceasefire deal.

Merkel's position as German leader means she sets the tone of EU relations with Russia and has taken the lead within Europe in trying to persuade Putin to change tack over Ukraine. She had a rocky time in Milan, however, with one German official saying the Russian leader had not displayed a "too constructive mood".

An initial meeting set for Thursday was delayed for hours because Putin flew into Italy well behind schedule. They then held more than 2-1/2 hours of talks that ran well past midnight, with both sides acknowledging discussions had been unproductive.

On Friday, Merkel reprimanded the former Soviet KGB spy in front of EU and Asian leaders, according to people present.

After a speech in which Putin raised doubts about the sovereignty of Ukraine, Merkel reminded him of the 1994 Budapest agreement, in which Russia recognised the sovereignty and territorial integrity of Ukraine, including Crimea, a territory Russia seized in March and annexed.

The Kremlin also sounded unhappy about early meetings.

"The talks are indeed difficult, full of misunderstandings, disagreements, but they are nevertheless ongoing, the exchange of opinion is in progress," said Kremlin spokesman Dmitry Peskov, accusing some unnamed participants of taking an "absolutely biased, non-flexible, non-diplomatic" approach.

DEAL WITHIN REACH

Still, despite the difficult start, French President Francois Hollande said the later meetings were more productive.

"A deal on gas is now really within reach, which is very important for the Ukrainians and very reassuring for the Russians, because they really want to be paid," he said.

Russia is Europe's biggest gas supplier, accounting for around a third of its needs, and about half the Russian gas that the EU buys comes via Ukraine. The stand-off over pricing is the third in a decade between Moscow and Kiev, although this time the stakes are higher because of the fighting in Ukraine.

More than 3,600 people have died in eastern Ukraine since fighting broke out in mid-April when armed separatists declared they were setting up their own states in two provinces.

Although Putin announced this week that Russian troops near the border with Ukraine would be pulled back, Western officials want to see clear evidence that Moscow is acting on this.

"Vladimir Putin said very clearly he doesn't want a 'frozen conflict' and doesn't want a divided Ukraine," British Prime Minister David Cameron said.

"But if that's the case, then Russia now needs to take the actions to put in place all that has been agreed. If those things don't happen, then clearly the European Union, Britain included, must keep in place the sanctions and the pressure so we don't have this sort of conflict in our continent."