By Dmitry Zhdannikov and Pavel Polityuk
MOSCOW/KIEV (Reuters) - Russia shut down all gas flows to Europe through Ukraine on Wednesday and told Kiev it would restore supplies only after it had agreed to pay full market prices.
The Kremlin quoted Russian President Dmitry Medvedev as telling Ukrainian leader Viktor Yushchenko in an evening telephone call that gas supplies had become hostage to squabbling within the Ukrainian leadership.
The apparent tone of the conversation reflected the broader political tensions between Ukraine and its former Soviet master in Moscow. Yushchenko's efforts to join NATO are bitterly opposed by Moscow and viewed with wariness even by European members of the alliance and by investors.
The row over gas prices and debts owed by Ukraine to Russia cut heating to tens of thousands of households in Bulgaria and hit supplies as far west as France and Germany as Europe faced freezing mid-winter temperatures.
"The price should be a market price based on a pricing formula," the Kremlin quoted Medvedev as telling Yushchenko.
"There will be no discounts or preferences for Ukraine."
Ukraine, an ex-Soviet state with a large Russian-speaking population, had long been paying prices below world levels for gas.
Russia's move to raise prices and its August invasion of a breakaway region of ex-Soviet Georgia have both been a source of conflict between Yushchenko and his prime minister, Yulia Tymoshenko.
Ukrainian state energy firm Naftogaz dismissed as 'provocative' accusations by state-run Russian gas export monopoly Gazprom that Kiev had broken international law and its gas transit obligations by holding back gas deliveries intended for transit to Europe.
It said its head Oleh Dubyna might meet the chief executive of Gazprom in Brussels on Thursday and was ready for constructive talks.
Kiev and Moscow blamed each other for the cut in supplies and the European Union said they should allow an EU monitoring mission to check how much gas was entering Ukraine from Russia.
MARKET RISE
"If this is agreed, nothing will stand in the way for transit supplies to be restored... That does not mean that success is 100 percent assured," said Mirek Topolanek, the Prime Minister of the Czech Republic, which currently holds the European Union presidency.
The two sides will meet in Brussels on Thursday and the EU said they appeared willing to accept monitors.
Gazprom said it had fully suspended supplies of transit gas towards Ukraine on Wednesday after accusing Kiev of tapping it off.
Gazprom said it was increasing supplies to the European Union and Turkey via other routes. Despite those measures, the dispute cut Russia's supplies to Europe -- which depends on Moscow for a quarter of its gas supplies -- by half.
The reduction in supplies started on January 1 when Russia reduced gas volumes to Ukraine, and has been sharper and more prolonged than a similar disruption in January 2006.
Pro-Western President Yushchenko appealed to the European Union to use all efforts to help end the crisis.
Eastern and central Europe have borne the brunt of the row, with Bulgaria cutting back or suspending supplies to industrial users and at least 45,000 Bulgarian households going without central heating on Wednesday. Schools were shut and some companies were closed.
Croatia's government declared a crisis after all its Russian gas deliveries were halted, and said it would start ranking consumers in terms of priority.
The Hungarian unit of Japanese car maker Suzuki, one of Hungary's biggest exporters, halted production after Hungary imposed restrictions on industrial users of gas, a Suzuki spokeswoman said.
In Bosnia, the sole alumina factory said it had been forced to stop production and ArcelorMittal said it was suspending production at its Zenica plant.
The euro zone's major economies have escaped significant economic repercussions, but France has reported a drop in supplies and an Italian industry ministry spokesman said Italy has begun tapping its stockpiles of natural gas.
German energy provider E.ON Ruhrgas reported a drastic decline in incoming Russian gas deliveries, but said no industry or households would be short of gas. It has warned that prolonged cuts combined with a cold spell could cause shortages.
Big energy users like aluminium, glass and metals makers could be hurt by a lengthy crisis.
Energy prices on international markets have risen in response to the Ukraine-Russia dispute. On the British gas market, the biggest and most liquid market in Europe, contracts on Tuesday rose to the highest level since October, although they softened on Wednesday.
(Additional reporting by Christian Lowe, Robin Paxton and Amie Ferris-Rotman; writing by Philippa Fletcher; editing by Ralph Boulton)
