The EU on Wednesday formally charged Russian gas giant Gazprom with abusing its dominant market position in Europe, risking a new battle with the Kremlin and deepening the crisis over Ukraine.

The European Commission accused state-owned Gazprom with infringing the bloc's single market rules as tensions between the Europe and President Vladimir Putin's Russia are at their worst since the end of the Cold War.

With the political stakes so high, the Commission had been reluctant to move against Gazprom for fear of further angering Russia, which supplies Europe with one third of its gas supply, half of which moves through war-torn Ukraine.

"All companies that operate in the European market -- no matter if they are European or not -- have to play by our EU rules," said Margrethe Vestager, the Competition Commissioner who last week opened a similar high-profile case against US Internet giant Google.

But Vestager insisted the case, first launched in 2012, was straightforward and based strictly on competition policy despite what she acknowledged to be a highly charged political context.

"This is a competition case, this is how we have proceeded, as always it is based on facts," she said.

The Commission, the EU's powerful executive arm, said investigators had found that Gazprom significantly hindered competition in Central and Eastern European gas markets, where the company is by far the dominant supplier.

Specifically, the EU accused Gazprom of breaching single market rules by forbidding the resale of its gas between EU countries, allowing the Russian giant to charge unfair prices.

Vestager said these "artificial barriers were preventing gas from flowing from certain Central Eastern European countries to others, hindering cross-border competition."

- Gazprom says charges unfounded –

Gazprom firmly rejected the EU accusations, adding it adhered to trade laws in all the countries it did business.

"Gazprom considers the objections put forward by the European Commission to be unfounded," the company said.

If the claims are substantiated, Gazprom risks fines of up to 10 percent of total sales, which amounted to the ruble equivalent of 93 billion euros ($100 billion) in 2013, according to the latest data available.

The countries involved in the EU probe are Lithuania, Estonia, Bulgaria, Czech Republic, Hungary, Latvia, Slovakia and Poland -- all former Soviet-era satellites that have cast their future with the European Union, not Moscow.

Divisions within the EU and Gazprom's close ties to the Russian government has made the handling of the case especially sensitive for EU regulators.

Lithuanian President Dalia Grybauskaite, a staunch Kremlin critic, welcomed the probe, seeing it as a strong message against Russia.

"The era of Kremlin backed political and economic blackmail draws to a close," she said.

But others, such as Hungary and Slovakia, are against frontal attacks against Moscow.

EU states bought 125 billion cubic meters of gas from Gazprom last year, amounting to about 10 percent of Russia's total exports.

Gazprom has 12 weeks to officially respond to the charges and the EU left the door open for negotiating a settlement.

"What we fear most at this point is a knee-jerk reaction from the Russian government, one that would escalate the situation and cost Gazprom far more in the end," Moscow-based Sberbank Investment Research said in a note.

Russian Foreign Minister Sergei Lavrov said he felt the two sides would be able to reach a mutually acceptable agreement. (AFP)