Vladimir Putin has admitted Russia's dispute with Ukraine over gas supplies had led to a "real crisis" in relations between the two countries.
Four-fifths of Russia's gas passes through Ukraine
High-level talks are continuing in Moscow in an effort to resolve the dispute, centring on the amount that Ukraine pays for Russian gas imports.
Russia wants to raise prices fourfold and has threatened to cut off supplies on 1 January if terms are not agreed.
President Putin has offered Ukraine a loan to help it adjust to the deal.
While reiterating that Russia's price demands were unacceptable, Ukrainian President Viktor Yushchenko said on Thursday that a political solution must be found to the dispute.
After meeting with senior ministers and Ukraine's energy minister Ivan Plachkov, President Putin publicly acknowledged the scale of the dispute for the first time.
"You have simply created a real crisis and not only in the energy sphere," news agency Interfax reported Mr Putin as saying.
"This crisis appears to be a crisis between our two countries. This is very bad."
Russia insists that Ukraine must pay market rates for the gas from its state-owned firm Gazprom, which wants to quadruple prices to between $220 and $230 per 1,000 cubic metres.
Ukraine says it is happy to pay market rates, but wants price increases to be phased in gradually over several years.
In an apparent concession, Mr Putin said Russia would be prepared to offer Ukraine a loan in the region of $3.6bn to help it adjust to the new arrangement.
"We must give our Ukrainian partners the opportunity to arrange their budget in such a way that it can adapt to market relations," he said.
Ukraine has warned Russia that it may seek international arbitration if an acceptable compromise to the dispute is not reached.
It has argued that Belarus, a close ally of Russia, will pay just $46 per 1,000 cubic metres for gas after a recent agreement, while both Georgia and Armenia are also paying less.
President Yushchenko described the price demands as "provocative" but said he expected the dispute to be settled shortly.
"In one or two days, a political decision must be taken not by the experts but by the presidents of the two countries," he said.
Ukraine's state-owned gas company has said the country has enough supplies to survive the winter, should Russia cut off its imports.
Relations between Ukraine and Russia have been tense ever since the election of the pro-Western Mr Yushchenko in 2004.