MOSCOW: Russia said Wednesday it had clinched a deal with Turkey allowing it to lay the South Stream natural gas pipeline to Europe through its territorial waters.

The announcement delivers a vital boost to Moscow's hopes of building the link by the end of 2015 and beating a rival US-backed project that is still struggling to get off the ground.

The pipe would run under the sea from energy fields in Russia to the Balkans and eventually pump up to 63 billion cubic meters (2.2 trillion cubic feet) of gas per year to markets stretching from Italy and Slovenia.

"I would like to thank Turkey for its decision to issue final approval to construct the South Stream pipeline through Turkey's special economic zone," Putin said during talks with the visiting Turkish Energy Minister Taner Yildiz.

Russia's state-run energy giant Gazprom said it had also resolved a deliveries dispute with Turkey that saw Ankara revoke a contract with Russia earlier this year.

Gazprom said delivery terms for both the Western Pipeline to Istanbul and the Blue Stream pipeline under the Black Sea had been agreed through the end of 2012.

Terms of the agreement were not disclosed but the Russian media had earlier reported that Turkey was purposely delaying its approval of the South Stream route in order to bargain for lower prices.

South Stream has remained a controversial project because it threatens to increase further Russia's current dominance in the European natural gas market.

EU states receive more than a quarter of their gas from the world's largest energy producer and had been seeking to limit that dominance by diversifying import sources and breaking up Gazprom's grip on European energy routes.

Gazprom argues the link will only improve delivery reliability and help meet growing demand.

The project was originally conceived jointly by Gazprom and the Italian energy firm ENI and formally joined in September by Germany's Wintershall and the French power producer EDF.