Speaking after talks with Bulgarian leader Georgi Parvanov, Russian President Dmitry Medvedev said the two countries had agreed "to switch to the construction phase" as soon as possible and increase the pipeline's planned capacity.
The South Stream pipeline is designed to annually pump 31 billion cubic meters of Central Asian and Russian gas to the Balkans and on to other European countries, but its capacity could be increased by a further 16 billion cu m. The project involves Bulgaria, Serbia, Hungary, Italy and Greece.
Earlier at the talks, Parvanov said Sofia supported both South Stream and the rival, Western-backed Nabucco project, which is due to link energy-rich Central Asia to Europe through Turkey, Bulgaria, Romania, Hungary and Austria, bypassing Russia and Ukraine.
"We hope the construction of South Stream will be intensified, we will support this project, as well as Nabucco, which is a European priority," Parvanov said.
Parvanov said he was satisfied with the current phase of energy talks, urged a more reliable supply scheme without intermediaries and welcomed the search for new arrangements to ensure Europe's energy security.
"I am glad we have turned to face the acute issues relating to the gas crisis, which hit Bulgaria especially hard," he said.
The Balkan state earlier said more than 350 large companies were affected with 44 forced to shut down as Russian gas supplies via Ukraine were cut off on January 6 and only resumed on January 20 when Moscow and Kiev reached a deal after EU-mediated talks. Sofia estimated the losses to the country at 250 million euros (about $320 million).
Russia cut off gas supplies to Ukraine on January 1 after failing to reach a deal over debt and prices for 2009 in late December, and later halted gas deliveries to Europe, saying Ukraine was stealing transit gas. Kiev denied the accusation.
Russia's transit disputes with its former Soviet neighbors have raised concern in Europe about too much energy dependence on Russia.
Other agreements signed in the Kremlin include those on cooperation in the nuclear power, judiciary and welfare spheres.