Putin and his Armenian counterpart, Robert Kocharian, met one day after Armenia's foreign minister and his Azerbaijani counterpart held inconclusive talks in Moscow on the status of the mountainous territory inside Azerbaijan that is controlled by ethnic Armenian forces.

"The potential for conflict is still very high," Putin said at a joint news conference with Robert Kocharian in the Black Sea port of Sochi.

A shaky cease-fire in 1994 ended six years of fighting that left 30,000 people killed and about 1 million driven from their homes and left Karabakh and Armenian forces in control of the territory. Gunfire breaks out regularly along the border between the two ex-Soviet countries and in the regions near Nagorno Karabakh.

Repeated efforts by international mediators, including Russia, France and the United States, to resolve the dispute have failed, and the lack of resolution has tied up development in the energy-rich South Caucasus.

We have problems with Azerbaijan on the Nagorno Karabakh settlement. We are conducting active negotiations," Kocharian said. "The most important factor is that the cease-fire introduced in the region in 1994 remains effective until now. This proves the intentions of the parties to adhere to the peaceful process within the framework of the OSCE."

Armenia is Russia's closest ally in the South Caucasus, and Yerevan in recent years has turned over a substantial part of its energy infrastructure and network to Russia companies.

Among the other South Caucasus nations, Azerbaijan is increasingly asserting its substantial energy reserves and its independence from Russia while Georgia is actively seeking tighter ties with NATO, the European Union and the West.

Azerbaijan, flush with oil and gas revenues, has also markedly increased its defense spending and warned that it has the potential to retake Nagorno Karabakh from ethnic Armenians forces - raising fears of a new outbreak of fighting if no final resolution for the territory is found. The Associated Press

/The International Herald Tribune/