UPDATE 2-Russia lets Ukraine off costly gas deal

* PM Putin meets PM Tymoshenko for gas talks in Poland

* Russia agrees to lower gas sales to Ukraine

* Tymoshenko invites Putin to Ukraine ahead of election

SOPOT, Poland, Sept 1 - Russia agreed on Tuesday to let Kiev pay only for the gas it consumes, safeguarding the fragile Ukrainian economy from potentially huge fines for buying less gas than it has promised to import.

This could enable Ukraine, where gas needs have diminished, to buy half the amount next year that it had originally promised to take when it signed a crucial deal with Moscow in January to end a three-week standoff that led to supply cuts to millions of Europeans.

"We feel that all the crisis-inducing occurrences in this sphere have gone," Ukrainian Prime Minister Yulia Tymoshenko said after meeting her Russian counterpart Vladimir Putin in the Polish seaside resort of Sopot.

"We have together with Vladimir Vladimirovich (Putin) discussed again the size of Ukrainian demand for Russian gas and the position of the Russian prime minister is very important -- Ukraine will pay for the gas that it needs," she said.

Russia's Gazprom, the world's biggest natural gas company, supplies a quarter of the European Union's gas and most of this goes through pipelines across Ukraine.

Ukraine is Gazprom's largest consumer and had promised to buy 40 billion cubic metres (bcm) this year and over 50 bcm next year, according to Ukrainian officials.

However, as Ukraine suffers from a deep economic recession and industrial slowdown, officials have said it needs only 32-33 bcm of gas this year and 25-27 bcm next year -- half of the contracted amount.

Putin said the two prime ministers had "agreed that the current global financial crisis...must be taken into account in our bills and supplies".

"We'll give the order to the companies to respect the circumstances. We understand that the Ukrainian economy uses only that which it needs today," he said.

UKRAINIAN ELECTION WATCH

Diplomats say they are closely watching the relationship between former Kremlin chief Putin and Tymoshenko, the most popular Ukrainian politician now holding office, ahead of Ukraine's Jan. 17 presidential election.

Moscow is eager extend Russian business interests in Ukraine after President Viktor Yushchenko beat Viktor Yanukovich, a then Kremlin-backed candidate in the 2004 "Orange Revolution" presidential election battle.

"Our meeting was very important for Ukraine," Tymoshenko said with a smile. "Our next meeting will take place in October and we plan it in Ukraine. I invite you and your team."

Tymoshenko's warmer ties with Russia over recent months have provoked speculation that Moscow may be backing her in the election to gain influence over the former Soviet republic.

Putin said he was glad to see Tymoshenko again.

"We remain the biggest partners in the sphere of the economy and we always have something to speak about," said Putin.

"Traditionally, attention is focused on energy but besides this, there are other areas of our cooperation," Putin said. (Additional reporting by Pavel Polityuk in Ukraine)