AP National Writer
KIEV, Ukraine (AP) -- Ukraine said Thursday it was suspending preparations to sign a landmark agreement with the European Union and would focus instead on restoring ties with Russia, appearing to yield to pressure from its powerful neighbor and dealing a harsh blow to plans for the ex-Soviet nation to integrate further with the West.
The Cabinet's decision follows the Ukrainian parliament's refusal earlier Thursday to pass a bill allowing the release of jailed former Prime Minister Yulia Tymoshenko, a key EU condition for signing the deal at a summit next week.
Kiev's turnaround would mark a major victory for the Kremlin, which has worked aggressively to derail the EU deal by offering Kiev loans and price discounts, but also by imposing painful restrictions on some of Ukraine's exports.
About 1,000 protesters rallied against the decision in a central Kiev square Thursday night, waving Ukrainian and EU flags.
EU Enlargement Commissioner Stefan Fuele canceled a planned visit to Kiev on Friday after the Cabinet's decision.
"Ukraine government suddenly bows deeply to the Kremlin. Politics of brutal pressure evidently works," Swedish Foreign Minister Carl Bildt, a key advocate of the signing of the treaty, wrote on Twitter.
Energy Minister Yuri Boiko told reporters Thursday that Ukraine cannot afford to lose economic ties with Moscow and that the EU has refused to offer compensation for the loss in trade with Russia.
Boiko also expressed hope that improving trade with Russia would make Ukraine less dependent on IMF bailouts, which it has long sought to get.
"We have not received a clear signal from our European partners that these losses, which we have been receiving over the past four months, would be compensated," Boiko was quoted as saying by the Interfax news agency. "The country cannot afford it; that is why this (government) resolution came into being."
Kremlin spokesman Dmitry Peskov was careful not to comment on Kiev's decision, saying it was Ukraine's internal affair, but he added that Russia welcomes Ukraine's intention to expand trade and economic cooperation.
But the Kremlin-connected head of the foreign affairs committee in the Russian parliament's lower house, Alexei Pushkov, sounded openly triumphant on Twitter: "The EU has overdone putting pressure on Ukraine: an agreement of dubious benefit for Ukraine was also contingent on political conditions. That was a major error."
EU foreign policy chief Catherine Ashton called the decision a disappointment, arguing the deal would have helped Ukraine reverse a decline in foreign investment and helped it in its talks with the IMF.
"We believe that the future for Ukraine lies in a strong relationship with the EU and we stand firm in our commitment to the people of Ukraine who would have been the main beneficiaries of the agreement though the enhanced freedom and prosperity the agreement would have brought about," she added in a statement.
Some observers remained optimistic, saying Thursday's developments did not mean Kiev's complete surrender to Moscow, but was maneuvering by Viktor Yanukovych, who hopes to convince the EU to sign the agreement even without his rival Tymoshenko's release.
Theoretically, Yunukovych still had a week before the summit next Thursday to either pardon Tymoshenko or to get his parliament to pass a law on her release. Yanukovych's office said he still plans to attend the summit in Vilnius, Lithuania.
Parliamentary debates of that bill were set to continue Friday, pointing to the possibility that Yanukovych is trying to force more concessions out of the EU.
"My initial read is that this is just again bluff by Yanukovych ... hoping the Europeans come running and cave in to his demands," said Tim Ash, chief emerging-markets economist at Standard Bank in London. "He is taking a big risk here now of a public backlash, and he could be waving goodbye to re-election chances in 2015."
German Foreign Minister Guido Westerwelle left the door open for Kiev to make progress toward the EU deal.
"Our offer of a real partnership stands. But this requires there to be a willingness in Kiev to go down a European path of development," Westerwelle said in a statement. "The ball is in Ukraine's court. It is her sovereign right to freely decide her path."
U.S. State Department spokeswoman Jen Psaki said that if the reported decision is final, then "we're disappointed."
"We believe there was ample time to resolve all remaining obstacles" to signing, she said.
Opposition leaders meanwhile, slammed the surprise Cabinet decision. "This is not just treason, this gives grounds to impeach the president," said Tymoshenko ally Arseniy Yatsenyuk.
Opposition leaders called on Ukrainians to show up for a major demonstration in Kiev on Sunday to press Yanukovych to turn back toward the EU.
Vladimir Isachenkov in Moscow, Frank Jordans in Berlin and Raf Casert in Brussels contributed to this report.
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