By Jonathon Burch and Ibon Villelabeitia
ANKARA (Reuters) - Turkey signed a deal with the breakaway Turkish Cypriot state on Wednesday to pave the way for offshore gas exploration in a move set to escalate regional tensions over Mediterranean energy reserves.
On Tuesday, the Greek Cypriot government, which has been at loggerheads with Turkey since its military invasion of north Cyprus in 1974, said drilling had begun in a southeastern offshore block, adjoining a gas field in Israeli waters reputed to be the world's largest find of the past decade.
Turkish Prime Minister Tayyip Erdogan described the offshore gas drilling by Cyprus and Turkey's estranged ally Israel as "madness" before signing the deal with the Turkish Cypriots to clear the path for Turkish exploration off northern Cyprus.
"The continental shelf delimitation agreement between Turkey and Turkish Republic of Northern Cyprus has been signed now in New York between Erdogan and Dervis Eroglu," an official at the prime minister's office told Reuters, referring to the Turkish Cypriot leader.
Cyprus has been split since the 1974 invasion in the aftermath of a brief Greek-inspired coup in Nicosia, and Turkey maintains a military presence in the Turkish Cypriot state.
Turkey argues that the Greek Cypriot government should not have started deciding maritime borders before reaching a settlement in reunification talks with the Turkish Cypriots, and that the mineral wealth belonged to both communities.
"The Greek Cypriot administration and Israel are engaging in oil exploration madness in the Mediterranean," Turkish state news agency Anatolian quoted Erdogan as telling Turkish journalists in New York on Wednesday.
"Actually, the Greek Cypriot administration's drilling activity is nothing but sabotage of the negotiation process between Turkish Cypriots and Greek Cypriots," he added.
Peace talks between the two sides were launched in 2008 but progress has been slow. The United Nations is tentatively eyeing a settlement before July 2012 when Cyprus is due to assume the European Union's rotating presidency.
Turkey is the only country to recognize the Turkish Cypriot state, while the Greek Cypriot government is internationally recognized and represents the island in the European Union.
The row over hydrocarbon reserves erupted as relations between Turkey and Israel abruptly broke down over Israel's refusal to apologize for killing Turkish activists aboard a ship carrying aid to Palestinians in Gaza last year.
Under Erdogan, Turkey has become increasingly assertive in the region and it disputes the offshore territorial agreement struck last year by Cyprus and Israel.
Texas-based Noble Energy which is carrying out the drilling operations for Cyprus, has been conducting offshore drills in the eastern Mediterranean for Israel since 1998.
Turkey has said it would use its navy and air force to escort any gas exploration vessels it may dispatch in the Mediterranean if Cyprus pressed ahead with drilling.
Erdogan again referred to Turkey's military muscle on Wednesday: "Our assault boats and frigates are already in the region," Anatolian quoted him as saying.
Last week the Turkish leader said warships could be sent to the eastern Mediterranean any time and Israel could not do whatever it wants there.
The United Nations is trying to unite Cyprus as a federation and wants the talks to conclude by mid 2012. The European Commission has called for Cyprus and Turkey to show restraint in the gas row and work toward a settlement on the island.
Cyprus has said it will block negotiations Turkey began in 2005 to join the European Union if Ankara continues to oppose its gas exploration. Turkey has said it will freeze relations with the EU Presidency if Cyprus is given the role next July before a settlement over the island is reached.
(Additional reporting by Ece Toksabay in Istanbul; Editing by Michael Roddy)