By Barbara Lewis and Adrian Croft
BRUSSELS (Reuters) - EU leaders on Monday gave visiting Ukraine President Viktor Yanukovich until May to show his nation had made progress towards political reform if it is serious about clinching a free trade deal which would move it away from Moscow's orbit.
Both the European Union and Ukraine are keen to cut their dependency on gas giant Russia, but Ukraine has yet to make a clear choice between closer EU ties or tighter links with Moscow.
The EU has set a November target for signing an ambitious free trade and political association agreement that would anchor Ukraine in the Western camp, but says a deal is conditional on improved human rights and addressing "politically motivated convictions" - a reference to the jailing of former Prime Minister Yulia Tymoshenko, Yanukovich's arch rival.
After talks with Yanukovich in Brussels on Monday, European Council President Herman Van Rompuy told a news conference that EU authorities still needed to see tangible progress "at the latest by May".
The May deadline was chosen because some time would be needed after that to tie up any loose ends if an agreement is to be signed in November.
EU leaders also made clear Ukraine had to make a choice as membership of the EU's free trade agreement was incompatible with belonging to Moscow's Customs Union.
"What we have to be clear about is one country cannot at the same time be a member of a customs union and be in a ... free trade area with the European Union. This is not possible," European Commission President Jose Manuel Barroso said.
"But I believe there are some pragmatic ways to address this issue."
Yanukovich said he was working on finding a "model of cooperation" with the customs union, which could form the basis of a compromise.
Ukraine, a transit state for nearly 70 percent of all Russian gas shipped to the European Union, and itself heavily reliant on Russian supplies, has repeatedly clashed with Moscow over its gas bills.
Russia has said it would only lower the price of gas to Ukraine if it allows Moscow to take over its pipeline network or if it joins the Russia-led Customs Union trade bloc.
The European Union signed an outline agreement on Monday to provide Ukraine with up to 610 million euros ($803 million) in "macro-financial assistance", but made it conditional on Ukraine meeting International Monetary Fund terms. It did not specify whether the money would be a loan or a grant.
Ukraine's relationship with the IMF is potentially complicated by Yanukovich's pledge to keep down gas prices for domestic customers as the IMF has insisted Ukraine should reduce the amount it spends on subsidizing prices to cut its budget deficit.
In the past, Ukraine's quarrels with Moscow over gas prices have led to supply disruptions to the European Union, which depends on Russia for roughly a quarter of its gas.
All parties are seeking to increase their options.
Russia has been busy building pipelines to bypass Ukraine and pushing Kiev to cede control of its pipeline network.
The European Union has been exploring ways to diversify its suppliers by piping Azeri gas to Europe, while Ukraine, which signed a deal with Royal Dutch Shell last month, is seeking to develop its shale reserves.
EU Energy Commissioner Guenther Oettinger met Ukrainian Energy Minister Eduard Stavitsky last week to discuss cooperation in the energy sector. One area they agreed to look at was whether Ukraine's large gas storage facilities could be used by European companies to balance out seasonal swings.
In an apparent attempt to increase Ukraine's leverage on Moscow to cut gas prices, Stavitsky said Ukraine is in talks to completely replace Russian gas imports with those from the EU.
"We are fully in agreement and have a detailed plan (on gas supply diversification) that we will implement shortly," he told reporters in Brussels. He said the gas would come from countries such as Slovakia, Hungary and Poland.
(Additional reporting by Francesco Guarascio in Brussels and Olzhas Auyezov in Kiev; Writing by Barbara Lewis; Editing by Jon Hemming)
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