Russia and Ukraine reached a face-saving deal yesterday in a bitter gas dispute which hit supplies to Europe.

The European Union welcomed the five-year pact but still held talks to discuss energy security after the sudden reduction over the New Year of Russian deliveries, which cover a quarter of the continent's needs.

The accord calms tensions between the ex-Soviet neighbours which peaked on January 1 when Russia's state gas monopoly Gazprom cut deliveries to Ukraine to press its demand for a fourfold hike in export prices.

European consumers suffered a sharp, two-day drop in deliveries of Siberian gas pumped westward across Ukraine, before full pipeline pressure was restored.

"We have reached a final agreement," Gazprom Chief Executive Alexei Miller told reporters after crisis talks in Moscow with Ukrainian officials.

"This agreement will ensure stable supplies to Europe."

Details were sketchy, but Miller said the deal was effective from January 1 and based on a price of US$230 per 1,000 cubic metres of gas.

That is up from the US$50 Ukraine had paid under an existing cut-price deal.

But, after mixing in extra supplies from the Central Asian states of Turkmenistan and Kazakhstan, Kiev will pay an average gas import price of US$95 per 1,000 cubic metres, both sides said.

Ukrainian Prime Minister Yuri Yekhanurov welcomed the deal but said his country would have to work to reduce its dependency on Russian gas.

"It was a serious lesson for us," he said in Kiev.

Importantly for the supply security of major consumers such as Germany, France and Italy, the two sides agreed to increase fees for gas transit Russia pays to Ukraine, the route taken by 80 per cent of Russian gas pumped to European consumers.

Investors welcomed the deal, pushing the value of Gazprom's London-listed depositary shares up by over 4 per cent to US$76.50.

Based on a back-of-the-envelope calculation, the gas deal will cost Ukraine an extra US$2.9 billion this year.

"This is a good outcome because Gazprom will receive significantly greater revenue from Ukraine for its gas," said Bill Browder, CEO of Hermitage Capital Management, which owns US$3 billion in Russian shares including Gazprom stock.