UPDATE 2-Putin tells Ukraine to compromise on gas pipelines

* Putin accuses Ukraine of making "strategic error"

* Russia builds undersea pipelines to bypass transit states

* Russia wants Ukraine to join trade zone

* Putin to Brussels for EU summit on Friday

(Adds detail, quotes)

Dec 20 (Reuters) - Russian President Vladimir Putin

criticised Ukraine on Thursday for its failure to strike a

compromise deal on gas supplies, a stance which led to the

last-minute cancellation of a visit to Moscow by President

Viktor Yanukovich this week.

Russia has been pushing for Kiev to cede control of its gas

pipeline network, through which Europe receives around two

thirds of its transit supplies of Siberian gas, holding out the

prospect of a cheaper gas price for Ukraine in return.

But Yanukovich pulled out of gas price talks with Putin at

the last minute on Tuesday, after a Kremlin foreign policy aide

said the Ukrainians had argued they needed more time to prepare

documents the two sides had planned to sign.

Speaking at a major news conference, Putin said Ukraine had

blundered by refusing to lease its gas transportation system to

both Moscow and the European Union.

"Our Ukrainian partners made a very big error, just a

strategic error, a fundamental one," Putin said in response to a

question from a Ukrainian journalist.

"We and the Europeans offered to lease it, without breaking

Ukrainian law, leaving this network in the ownership of the

Ukrainian state."

Putin also called the need for Ukraine's pipeline system

into question at a time when Russia is increasingly seeking to

bypass transit countries by building direct, underwater, links

to Europe and by developing its capacity to export liquefied

natural gas.

"The very existence of Ukrainian gas transportation system

is questionable," he said during the news conference, which

lasted for over 4-1/2 hours.

Europe relies on Russia to cover a quarter of its gas needs,

but over the past decade Moscow has had a series of disputes

with its ex-Soviet neighbours - Ukraine and Belarus - that have

threatened the flow of its gas exports to Europe.

Last year, Russia shipped 150 billion cubic metres (bcm) of

gas to Europe, but volumes have declined this year as buyers

increasingly turn to alternatives such as LNG or cheaper gas on

the spot market.

CLOSER TO THE KREMLIN

Putin is trying to forge closer ties with the states of the

former Soviet Union, whose collapse he has called "the biggest

geopolitical catastrophe of the century".

He has already launched a free-trade zone between Russia,

Belarus and Kazakhstan, known as the Customs Union. Last year,

Belarus received a huge discount on gas - it pays around $170

per 1,000 cubic metres of Russian gas, much lower than the $430

price for Ukraine, which is only an observer of the trade bloc.

Moscow has invited Ukraine to join the Customs Union as part

of a newly proposed gas deal, that would cut the price Ukraine

pays for its energy intensive economy, which is heavily reliant

on exports of steel and grain.

But Kiev, seeking to boost its economic and political ties

with Europe, has so far balked at joining the trade zone as that

would make it more difficult to eventually follow the path of

other ex-communist states to EU membership.

Although Yanukovich has sought to align Ukraine's foreign

policy with that of Russia since becoming president - for

example, by abandoning the goal of joining the NATO alliance -

European integration remains a political priority for Kiev.

Ukraine has cut Russian gas purchases to 27 bcm this year

from about 40 bcm in 2011 to save on its import bill. Talks with

the International Monetary Fund on a credit line have been

delayed because Ukraine has not hiked subsidised gas prices.

Russia is trying to bypass the transit states, having

already commissioned the Nord Stream pipeline under the Baltic

Sea to Germany, capable of pumping 55 bcm of gas per year.

Gas export monopoly Gazprom has just started work

on South Stream, an ambitious project to bypass the transit

nations to the south, that would be able to ship 63 bcm/year

from mid-decade.

Putin, who travels on Friday to Brussels for a Russia-EU

summit, said Russia will soon overcome its dependence on the gas

transit states.

He said he did not challenge the legitimacy of a 10-year gas

contract signed with Ukraine in 2009 - over which Ukraine's

former prime minister, Yulia Tymoshenko, was jailed on charges

of abuse of office.

But Putin expressed concern about the upkeep of Ukraine's

gas transportation network, saying its existence and future

viability were open to question.

(Reporting by Alexei Anishchuk; Writing by Vladimir Soldatkin;

Editing by Douglas Busvine and Andrew Osborn)

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