* Gazprom, OMV sign deal to bring South Stream to Austria
* OMV CEO says Europe will need more, not less, Russian gas
* Putin, Austrian counterpart hail close bilateral ties (Adds comments from Putin, Austrian President Fischer)
By Georgina Prodhan and Michael Shields
VIENNA, June 24 Austria gave its final approval to a controversial Russian gas pipeline project on Tuesday, defying EU officials and welcoming Russian President Vladimir Putin to the neutral country that has been a long-standing energy customer for Moscow.
The chief executives of Russia's Gazprom and Austria's OMV sealed the deal to build a branch of the South Stream gas pipeline to Austria, a staunch defender of the project in the face of opposition from the European Commission.
South Stream, which will cost an estimated $40 billion, is designed to carry Russian gas to the centre of Europe, a continent already dependent on Russia for a third of its gas needs, on a route that bypasses current transit country Ukraine.
The Commission says South Stream as it stands does not comply with EU competition law because it offers no access to third parties. South Stream also counters the EU's policy of diversifying supply sources to reduce dependence on Russia.
But OMV CEO Gerhard Roiss told a news conference after the signing: "Europe needs Russian gas. Europe will need more Russian gas in future because European gas production is falling ... I think the European Union understands this, too."
The project has pitted European industry against politicians in Brussels, and divided South Stream supporters - which stretch from Germany through the heavily Russia-dependent central and southeastern Europe - from other EU member states.
On a one-day working visit to Vienna that drew some criticism in the EU, Putin spoke of close business ties to Austria, the first western European country to sign, in 1968, long-term gas supply deals with Moscow.
He called Austria an "important and reliable" partner for Russia, which is Austria's third-biggest non-EU trading partner after the United States and Switzerland.
Austrian President Heinz Fischer also defended the South Stream project, saying: "No one can explain to me - and I can't explain to the Austrian people - why a pipeline that crosses EU and NATO countries can't go 50 km into Austria."
He said he opposed sanctions against Moscow, but also told Putin Moscow's annexation of Crimea violated international law.
The mood turned jovial when the head of Austria's chamber of commerce reminded Putin that part of Ukraine had belonged to Austria in 1914.
"What is that supposed to mean? What are you proposing?" Putin quipped, eliciting laughter from the business elite.
The EU has said it has no criticism of Austria's hosting Putin despite frosty ties with Moscow. He visited France for World War Two commemorations this month.
But some politicians have warned that Putin may try to exploit divisions between friendly EU states, such as neutral Austria with its traditionally good ties to Moscow, and those like Britain that want to take a harder line.
"Obviously ... Putin wants to split the European Union. That's nothing new. That's what the Russians always try to do when they are in a corner," Swedish Foreign Minister Carl Bildt told Austrian broadcaster ORF on Monday.
TALKS WITH BRUSSELS
Gazprom chief Alexei Miller said earlier he was in weekly if not daily contact with European Energy Commissioner Guenther Oettinger about winning approval for the South Stream project.
"We solve problems as they come up, and now the problem of construction of the pipeline is to be solved," Miller said.
The pipeline deal does not address the question of third-party access, which is required by EU law to prevent the owner of an energy source from monopolising its distribution channels. OMV's Roiss said the issue must be negotiated with Brussels.
Roiss said the Austrian part of the pipeline, which is planned to be built in 2016 and deliver its first gas supplies around the start of 2017, would comply fully with European law.
Gazprom and OMV said they would split the 200 million euro ($272 million) costs of building the 50-km (31- mile) Austrian stretch of South Stream, which in total will be 2,446 km long.
The route travels across Russia, under the Black Sea and then through Bulgaria, Serbia, Hungary and Slovenia to Austria. Another branch may be built to Italy.
Gazprom's partners for the offshore part of the project are Italy's ENI, Germany's Wintershall Holding and France's EDF.
($1 = 0.7357 Euros) (Editing by Noah Barkin, Michael Shields and David Evans; editing by Ralph Boulton)