Moscow (AFP) - Russian President Vladimir Putin on Tuesday gave Ukraine precious backing by agreeing to buy $15 billion of its debt and slash its gas bill by a third as it battles mass protests over the rejection of a historic EU pact.

The deal brought tens of thousands of pro-EU protesters flocking to Independence Square in the heart of Kiev to denounce what they saw as a sell-out by Ukrainian President Viktor Yanukovych to the Kremlin.

The help from Russia may allow Kiev to stave off the threat of an imminent balance of payments crisis and possible default amid a recession that has seen the economy shrink since the first half of last year.

But it may also give the Kiev protesters new momentum after Yanukovych's refusal to sign the historic Association Agreement with the European Union sparked the biggest protests since the 2004 Orange Revolution.

White House spokesman Jay Carney indicated that Washington was unimpressed by the deal, saying it would "not address the concerns" of the thousands of protesters camped out day and night on Independence Square over the last weeks.

Putin announced after about three hours of talks in the Kremlin that Russia would be dipping into its own finances to help its western neighbour.

"The Russian government made a decision to invest part of the National Welfare Fund to the amount of $15 billion in Ukrainian government securities," Putin said at a ceremony with Yanukovych.

Russia's Finance Minister Anton Siluanov said Moscow would invest the $15 billion (11 billion euros) into eurobonds that Kiev intends to issue by the end of next year. He said Russia would buy $3 billion of bonds in 2013, with purchases possibly starting by the end of this week.

The decision saw the yield on Ukraine's 10-year bonds plummet from 9.69 to 8.75 percent on the secondary market -- a drop that makes borrowing much easier for the cash-strapped government.

Putin also said Russia's state energy giant Gazprom would now sell natural gas to Ukraine at a price of $268.50 for 1,000 cubic metres -- a substantial discount from the current level of around $400.

Yet Putin stressed the two leaders did not discuss Ukraine's membership in a Russian-led Customs Union that the Kremlin hopes to build into a rival to the 28-nation European Union and which the Ukrainian opposition sees as a bid to revive the USSR.

"I would like to calm everyone down, today we have not discussed the issue of Ukraine joining the Customs Union at all," Putin said.

On the day she was sworn in for a third term at the helm of Europe's top economy, German Chancellor Angela Merkel warned against getting into a "tug-of-war" with Russia over Ukraine.

"A confrontation would not lead anywhere," she said in an interview with public television.

Her new foreign minister, Frank-Walter Steinmeier, warned that, in any case, the EU's promised financial aid to Kiev was falling short of its needs.

"I am sure that the proposed financial and economic aid is far from what is needed to save Ukraine from insolvency and to tie it economically to Europe in the long run," he said.

With Ukraine's economy struggling, Ukraine Prime Minister Mykola Azarov last week said Kiev would like to secure a 20-billion-euro ($27.5-billion) loan from the EU before signing a deal with the bloc.

Brussels immediately dismissed the idea, saying the EU would not get involved in a bidding war over Ukraine's future.

The ex-Soviet nation of 46 million has been at the heart of a furious diplomatic struggle since Yanukovych's shock decision last month to ditch the landmark EU partnership agreement and seek closer ties with its traditional master Russia.

Analysts said the deals announced by Putin should reduce Ukraine's current account deficit by around $4.5 billion a year but does not take the urgency out of overdue economic reforms.

"Today?s deal will provide some short-term relief for Ukraine. But significant challenges remain over the next couple of years," said Neil Shearing of the London-based Capital Economics consultancy.

Ukrainian opposition leader and heavyweight boxing world champion Vitali Klitschko said he suspected Yanukovych handed over Ukrainian firms and strategic assets as collateral to Russia in return for Putin's lavish help.

"There is one way out for the country: early elections. I challenge Yanukovych -- he is my personal rival and I challenge him to the ring," Klitschko told protesters braving freezing temperatures on Independence Square.

The boxer added he was relinquishing his WBC title to concentrate full time on politics.

Fiery nationalist leader Oleg Tyagnybok said Yanukovych had "pawned whole sectors" of the country's economy to Russia. "Yanukovych sold out Ukraine today by agreeing to credits under state guarantees," he fumed.