Russia's state gas monopoly Gazprom and Hungary's development bank signed a deal on Tuesday to establish a joint venture to build the Hungarian leg of the South Stream pipeline, Russian news agencies reported.
"I believe an important step has been taken today," Russian Prime Minister Vladimir Putin said after the talks with his Hungarian counterpart Ferenc Gyurcsany.
The 10-billion-euro (13 billion U.S. dollars) pipeline project is planned to deliver Russian gas to Southern Europe via the Black Sea and Central Europe, bypassing Ukraine, which has been the transit hub for Russian gas supplies.
The two sides also signed an accord on the construction of an underground storage facility for Russian gas in Hungary.
Putin said the capacity of the storage facility will be more than 1 billion cubic meters.
"It's a large volume, which will enable us to ensure energy security and the stability of Hungary's energy sector," Putin said.
Gyurcsany said the gas storage facility will hold enough gas to meet half of his country's current annual needs.
The Hungarian section of the South Stream will be built by 2015,the Hungarian premier said, adding that the storage facility will be put into service in 2012-2013.
Hungary depends heavily on Russian gas for its energy needs. Moscow's gas dispute with Kiev in January left many Hungarians without heating gas in the depths of winter.