The dispute between Russia and Ukraine over gas prices looks like escalating towards a January 1 deadline, and could have a severe impact on gas supplies throughout Europe.

Ukraine has previously enjoyed the benefit of cut-price gas in return for allowing Russia to pipe fuel across its territory to western Europe. But Gazprom, the state-owned Russian fuel company, wants to raise its price for gas supplied to the Ukraine by more than 400 per cent.

Ukraine hit back earlier this week when it warned that it had the right to take 15 per cent of the Russian gas piped to Europe in return for transit fees, a move that Gazprom warned would be tantamount to theft.

Russia provides the European Union with about half its gas imports - 80 per cent of that passing through pipelines that transit Ukraine.

Today, Ukraine’s prime minister denounced Russian demands as his country's energy minister travelled for Moscow to try to resolve the spiralling dispute between Russia and Kiev's west-leaning government.

"The Ukrainian side believes that the price increase is unacceptable and ... a direct economic pressure against Ukraine," Yuriy Yekhanurov, the Ukrainian prime minister, said.

His remarks marked the latest salvo in the dispute that could end in Russia cutting off nearly one-third of the gas that Ukraine uses. Gazprom says it is prepared to shut off gas to Ukraine on January 1 if an agreement is not reached.

About a third of Ukraine’s natural gas comes from Russia and Ukrainian officials say that increasing the price from $50 per 1,000 cubic metres could cripple Ukraine’s energy-intensive heavy industry and impede the country’s efforts to boost its economy.

Gazprom argues that Ukraine should pay $220 to $230 and has portrayed the demand as a justifiable move to scrap energy subsidies enjoyed by former Soviet nations.

Kiev has asked for the increases to be phased in over five years, and points out that other ex-Soviet countries such as Georgia and Armenia have had their gas tariffs raised far less - to just $110 per 1,000 cubic metres.

Belarus, a Russia ally, yesterday reached an agreement with Gazprom to receive gas for $46.68 per 1,000 cubic metres - just 20 per cent of what the company wants Ukraine to pay.

Ukraine’s relations with the Kremlin have been tense since last year’s Orange Revolution when reformist President Viktor Yushchenko came to power on a platform of moving Ukraine into closer integration with the West and away from Russia’s orbit.

The gas dispute comes just months before parliamentary elections in Ukraine in which the party of last year’s losing presidential contender, the Kremlin-backed Viktor Yanukovych, is poised to perform strongly.

He has accused Mr Yushchenko of provoking the dispute needlessly by souring ties with Russia through his pro-Western drive. Under constitutional changes in Ukraine, the winning party will choose the next prime minister who will have expanded powers at the expense of the presidency.

Ukraine uses almost 80 billion cubic metres of gas annually, receiving 25 billion cubic metres from Russia, and 36 billion cubic metres from Turkmenistan, pumped via Russia. Ukraine itself produces some 18 billion cubic metres.

Mr Yekhanurov, meanwhile, warned that he had ordered Ukraine’s Naftogaz company to prepare a motion against Gazprom before the Arbitration Institute in Stockholm, claiming that the Russian side intends to violate existing contracts. The arbitration body cannot undertake the case unless both parties request it.

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