"I'm sure that the pipeline will be built within the prescribed timeframe and will become a guarantee for security, stability and peace in the region

President Heydar Aliyev

It was due to have been signed earlier this year, but was delayed by a dispute over charges for transit rights.

In Baku, the two presidents, Heydar Aliyev of Azerbaijan and his Georgian counterpart, Eduard Shevardnadze, hailed the accord as an important step towards energy self-sufficiency.

Hope for heating

"I'm sure that the pipeline will be built within the prescribed timeframe and will become a guarantee for security, stability and peace in the region," Mr Aliyev said.

The BBC correspondent there says the pipeline offers the hope of a stable heating supply for people in both countries, who have suffered serious winter fuel shortages.

Shevardnadze hopes the deal will boost Georgia's economy

In rural areas, constant supplies of gas are a distant memory from Soviet days.

When complete, the $1bn pipeline could ship 7.2 billion cubic meters (252 billion cubic feet) of gas annually.

Azerbaijan hopes to export 89.3 billion cubic meters of natural gas to Turkey between 2004 and 2018.

The Baku-Tbilisi-Erzerum pipeline avoids crossing Russian or Iranian territory, which is widely seen in the region as a key aim of US foreign policy.

Tariff disagreement resolved

The signing of the deal on Saturday ends a serious disagreement over the transit tariff that Azerbaijan will pay to Georgia.

Georgia at first demanded $5 to $10 per 1,000 cubic meters (35,000 cubic feet) of gas shipped through the Georgian section of pipeline.

In the end it will be paid $2.50 in the pipeline's first years of operation, the president of Azerbaijan's state oil company, Natik Aliev was quoted as saying by the Associated Press agency.

The tariff will gradually increase to $5 over the next 20 years.

Georgia will be able to get part of the payment in gas, but no more than 5% of the pipeline's overall annual output.