By Richard Balmforth
KIEV (Reuters) - Ukrainian President Viktor Yanukovich is seeking to outmaneuver the European Union in a tussle over the fate of jailed opponent Yulia Tymoshenko by threatening to pull out of a landmark trade pact next week, a European diplomatic source said on Wednesday.
The source quoted Yanukovich as saying in a meeting with an EU representative: "The current situation does not allow me to sign." But the source said he believed Yanukovich was bluffing to secure better financial terms from the 28-member bloc in return for signing the free trade and cooperation deal.
Ukraine is scheduled to sign the far-reaching agreement at a summit in the Lithuanian capital Vilnius on November 29, marking a strategic shift westwards for the former Soviet republic away from Russia.
But success in Vilnius has been thrown into jeopardy by a wrangle over the plight of ex-prime minister Tymoshenko, Yanukovich's fiercest opponent, whom he only narrowly defeated in a run-off vote in February 2010.
The 52-year-old politician was jailed in 2011 for seven years for abuse of office after a trial which Western governments say was political. Most EU governments would like to see her released before the summit.
Anxious to prise Ukraine away from Russia's historic embrace, the EU has focused efforts on a compromise by having Ukraine adopt a law under which Tymoshenko would qualify for going to Germany for treatment. She suffers from chronic back trouble.
Yanukovich, who fears Tymoshenko's political rehabilitation could harm his chances of re-election in 2015, has stalled over letting her go.
"TENSE, NERVOUS" MEETING
The diplomatic source said Yanukovich made his comments to the EU's point-man on Eastern Europe, Stefan Fuele, at a "tense and nervous meeting" in Kiev on Tuesday.
The official said the EU side was treating the comment as a bluff by Yanukovich. The official and others in Brussels said it was aimed at extracting greater financial assistance and credits.
"My conviction is that he is still bluffing. He's increasing the price to get compensation and softer conditions," the source said.
Cash-strapped Ukraine faces heavy foreign debt repayments in 2014 as well as outstanding bills for deliveries of gas from Russia its main energy supplier.
At the same time, Yanukovich's government is resisting demands by the International Monetary Fund to raise domestic gas prices and allow the national currency, the hryvnia, to float more freely.
An official in Brussels speaking on condition of anonymity said: "There are still 7 days to go until the Vilnius summit so we're in a period of brinkmanship and bluffing.
"Yanukovich is trying to see how much he can get out of the EU, what guarantees or assistance the EU will provide if he signs the agreement."
Ukraine's parliament, dominated by deputies from Yanukovich's Regions Party and their allies, are due to meet again on Thursday to end the deadlock over Tymoshenko.
Though Yanukovich has refused to pardon her - something which would allow her to re-enter political life - he says he is ready to sign into law any proposal by parliament for her to go abroad for medical treatment.
But few people expect a clear-cut deal to emerge. The opposition accused his parliamentary supporters of stalling.
"Leaders of the three opposition parties have repeatedly stated their readiness to unequivocally support any proposal relating to the fate of Yulia Tymoshenko," a statement from Tymoshenko's Batkyvshchyna (Fatherland) party said on Wednesday.
"But not a single one of the five draft laws (for Tymoshenko's release) are acceptable to Yanukovich and the (ruling) Regions Party," the statement said.
Yanukovich will be on an official two-day visit to Austria from Thursday and will be able to distance himself from anything which happens in parliament.
(This story has been refiled to fix day in paragraphs one and eight)
(Additional reporting by Luke Baker in Brussels; Editing by Sonya Hepinstall)