UPDATE 1-Russia and Turkey sign deal to build TurkStream gas pipeline

(Adds details, background)

ISTANBUL, Oct 10 (Reuters) - Turkey and Russia signed a bilateral agreement on Monday to build the TurkStream undersea gas pipeline, which will allow Moscow to strengthen its position in the European gas market and cut energy supplies via Ukraine.

The agreement was signed in Istanbul in the presence of Russian President Vladimir Putin and Turkish President Tayyip Erdogan.

The deal foresees construction of two pipelines on the bed of the Black Sea. It was reported earlier that each line from Russia to Turkey would have the capacity to carry 15.75 billion cubic metres of gas a year.

A spokesman for Russian state gas producer Gazprom declined to comment on the financial details of TurkStream.

As part of the deal, Russia also agreed on a gas price discount mechanism for Turkey, Putin said.

Turkey is the biggest buyer of Russian gas after Germany, but a gas price dispute between Turkish pipeline operator Botas and Russia’s state gas producer Gazprom led to Botas launching international arbitration proceedings against Gazprom in October 2015.

Russian Energy Minister Alexander Novak told reporters on Monday that talks with Botas on a price discount were underway.

TurkStream is part of Russia’s plans to bypass Ukraine, which is the main route for Russian energy supplies to Europe. Spats over pricing between Kiev and Moscow have lead to suspensions of Russian gas flows to Europe via Ukraine.

Talks on TurkStream were halted after the Turkish military downed a Russian jet fighter near the Turkish-Syrian border last November, but both sides have since made significant progress to mend relations and agreed to revive trade relations in July after Erdogan expressed regret over the incident.

The plan for TurkStream emerged after Russia dropped plans to build the South Stream pipeline to Bulgaria due to opposition from the European Union, which is trying to reduce its dependence on Russian gas.

Initially, Russia had planned to ship 63 bcm of gas via TurkStream annually, some of it for onward delivery to Europe, but downsized the plan after opposition from the European Union. (Reporting by Olesya Astakhova; Writing by Vladimir Soldatkin; Editing by Susan Fenton)