Russian President Vladimir Putin has secured Bulgaria's participation in a €10bn pipeline that is intended to meet demand for natural gas in central and southern Europe.
The deal tightens Russia's hold on European energy supplies and will bring Bulgaria €1.4bn in cash annually.
Agreement on the South Stream project followed talks between Mr Putin's team and Bulgarian leaders.
Bulgaria was torn between Moscow's lucrative offer and loyalty to the EU's drive to ease dependence on energy supplies from Russia.
'Thanks to this project, Bulgaria becomes one of the key links in the European energy chain,' Mr Putin said after signing the agreement.
Under the project involving Russian gas export monopoly Gazprom and Italy's Eni, the pipeline will take 30bn cubic metres of gas under the Black Sea and re-emerge on Bulgaria's coast before following one of several possible routes to Italy.
The pipeline could pass through Greece and reach Italy, or go through Romania, Hungary, the Czech Republic and Austria.
It is expected to meet all demand for natural gas in central and southern Europe by 2013.
Gazprom CEO Alexei Miller said that a feasibility study of the pipeline was expected to be completed by 2008, and the whole project could take off in 2013.
The deal could upset the EU, which sees South Stream as a rival to its own Nabucco project. Nabucco is intended to bring Caspian and Central Asian gas to the EU.
An energy analyst with the Brussels-based International Crisis Group think tank said the deal is something the EU would prefer not to happen as it would make things harder for Nabucco.
Nabucco is equally owned by oil and gas companies in the transit countries: Austria's OMV, Hungary's MOL, Romania's Transgaz, Bulgaria's Bulgargaz and Turkey's Botas.
It is central to EU efforts to diversify gas supplies away from Russia after a political dispute between Moscow and Kiev cut exports in 2006.
Russia supplies 25% of the EU's gas and 80% of the exports travels via Ukraine.
But Mr Putin said South Stream means energy security in Europe, where gas and oil needs are growing.
