Russian energy giant Gazprom has stopped all gas deliveries to Europe, says Ukraine, a move the European Union labeled "unacceptable" as it proposed sending in observers to measure gas flows.
Low point: Russia and Ukraine are rapidly losing credibility with their gas customers
European Commission spokesman for energy issues Ferran Tarradellas said the idea would be for EU officials to "observe the volume of gas transiting between the two countries (Russia and Ukraine)."
A spokesman for Ukraine's state gas company Naftogaz said Gazprom completely stopped sending gas to European consumers at 7:44 am local time on Wednesday, Jan. 7.
The natural gas dispute has cut or limited supplies to at least a dozen nations since Jan. 1 and left tens of thousands of people without heat as governments scramble to find alternative energy sources.
Russia says it has limited supplies to Europe because Ukraine was stealing its gas. Ukraine, on the other hand, blames Russia for the shortfalls. Russia first stopped all gas shipments to Ukraine after the two countries failed to agree on prices and transit fees for the year.
According to the Oxford Institute for Energy Studies, Ukraine makes $3 billion (2.2 billion euros) a year by levying a transit fee on westbound gas -- giving it a keen interest in keeping the fuel flowing.
Both sides lose credibility
Timoshenko and Putin are on less cordial terms now
Sources in the EU have said the gas crisis is hurting the credibility of both Russia and transit country Ukraine.
"Russia and Ukraine are discrediting themselves as reliable energy sources," one EU diplomat told the DPA news agency after an emergency meeting of EU representatives in Brussels earlier this week.
Europe, Russia and Ukraine all rely heavily on one another in the lucrative trade in natural gas and Russia is the EU's single biggest source of the fuel. Roughly one quarter of all the gas consumed in the EU comes from Russian sources, with 80 percent of that gas passing through pipelines in Ukraine.
Diplomatic efforts reached the highest levels, with Russian Prime Minister Vladimir Putin and Ukrainian premier Julia Timoshenko both calling the head of the European Commission as the row began, to promise that the dispute would not lead to gas shortages in Europe.
But those pledges collapsed already on Tuesday as gas supplies nosedived in a number of EU states -- accompanied by a chorus of accusations between Moscow and Kyiv.
The EU, for its part, condemned the cuts as "completely unacceptable" and Czech Deputy Premier Alexandr Vondra likened the dispute to "holding countries hostage."
Bad time for damaged image
The crisis comes at a time when neither Russia nor Ukraine can well afford to lose more credibility in the EU's eyes.
Russia's image took a beating during the Georgia war
Ukraine has already seen its bid to join the bloc stall because of the paralyzing effects of its long-running political instability.
Russia, meanwhile, is still suffering from the diplomatic fall-out of its August invasion of Georgia and its subsequent decision to recognize the independence of Georgia's separatist provinces.
And the fact that the current crisis is a virtual replay of a dispute in 2006 has sparked a flurry of calls for the EU to find a way of getting gas without the help of either neighbor -- a result which would add a major commercial cost to the diplomatic one.
The Czech government, which currently holds the EU's rotating presidency, is now making the diversification of energy supplies one of the EU's top priorities over the next six months, with pipelines cutting out both Russia and Ukraine heading the list, Vondra said.
The dispute also gives a further boost to EU plans to increase the use of renewable energy sources, which can be produced at home.