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U.S. President George W. Bush (L) shakes hands with President of Russia Vladimir Putin at the G8 summit in Heiligendamm June 7, 2007. U.S. President George W. Bush sought to calm tensions with Moscow on Thursday ahead of a meeting with Russian President Vladimir Putin at a Group of Eight (G8) summit in Germany. [REUTERS]

Putin told Bush he would not seek to retarget Russian missiles on Europe if the United States agreed to put the radar-based system in Azerbaijan, a former Soviet republic bordering the Caspian Sea.

Bush's reaction to Putin's idea was: "Interesting proposal -- let's let our experts have a look at it," according to White House National Security Adviser Steve Hadley. Hadley was in their hourlong meeting on the sidelines of a summit of the world's eight major industrialized democracies -- the leaders' first since the dispute erupted earlier this year.

Bush has proposed basing the radar in the Czech Republic and interceptor rockets in Poland, rousing Moscow's suspicions that a system built in its backyard had to be aimed at it. The United States insisted the shield was aimed at any potential nuclear threat from Iran, not Russia, but Moscow declared the explanation "insufficient" as recently as Wednesday night.

With the dispute flaring in recent days into Cold War-style rhetoric and threats from Moscow, Putin's proposal to put the system in Azerbaijan came as a surprise.

U.S. officials were clearly scrambling to react afterward, huddling hurriedly before trying to explain it to the press.

"I think President Putin wanted to de-escalate the tensions a little bit on this issue, and I think it was a useful thing that he did," Hadley told a few reporters.

Putin said the existing radar station, built during Soviet times, is rented by Russia under a continuing agreement between Russia and Azerbaijan.

He argued the benefits of his suggested substitute: An Azerbaijan-based system would cover all of Europe rather than just part of it, and destroyed missile debris would fall in the ocean rather than on land.

Appearing together before reporters, Bush spoke before Putin and did not mention the alternative presented by his Russian counterpart, saying only that Putin "made some interesting suggestions."

The two leaders agreed to discuss the issue further during two days of talks beginning July 1 in Kennebunkport, Maine, at the Bush family's oceanfront compound. Lower-level officials in both governments also plan to explore it.

"This will be a serious set of strategic discussions," Bush said. "This is a serious issue, and we want to make sure that we all understand each other's positions very clearly."

The Russian leader said the proposed relocation would alleviate Russia's concerns about a European missile shield. "This will make it unnecessary for us to place our offensive complexes along the border with Europe," Putin said.

He laid out several other conditions, as well:

* Taking Russia's concerns into account.

* Giving all sides "equal access" to the system.

* Making the development of the system transparent.

"Then we will have no problem," the Russian leader said.

He also warned the United States not to proceed with building the system as planned while negotiations with Moscow take place.

"We hope these consultations will not serve as cover for some unilateral action," Putin said.

Hadley did not rule out the possibility that the end result would be some mix of the Russian and the U.S. proposals.

"We asked the Russians to cooperate with us on missile defense, and I think what we got is a willingness to do so," Hadley said after the Bush-Putin meeting.

U.S. Missile Defense Agency spokesman Rick Lehner said he didn't known whether Putin's proposal would work. "I don't know if there have been any studies done that would consider the geometry on places like Azerbaijan," he said.

The agency looked at all of Europe and "the interceptor and radar sites that met our requirements were Poland and the Czech Republic," Lehner said. The plan for two countries rather than one was considered more effective because it gives more time to track the missile, he said.

Both sides portrayed Putin's idea -- far from becoming a reality -- as proof that the U.S.-Russia relationship has not fallen so far as people have speculated amid the dispute. The leaders said they agreed Iran is the threat to focus on, not each other.

"We have an understanding about common threats, but we have differences," Putin said.

He declared himself "satisfied with the spirit of openness" he encountered in Bush. The U.S. president said they had demonstrated they share "the desire to work together to allay people's fears."

The two leaders, at loggerheads for weeks ahead of the much-anticipated meeting, appeared friendly as they spoke on the grounds of the upscale resort here where the summit is being held. They stood so close they often touched.

"I'd like to confirm what the president of the United States has said -- except for one thing: I've not said that friends do not act in this way," Putin said, to which both laughed heartily and jostled each other.

There are many items on the disagreement list between Washington and Moscow.

Russia is unhappy about U.S. support for independence for the breakaway Serbian province of Kosovo. It bristles at what it sees as U.S. meddling in its affairs and its traditional sphere of influence.

Washington, meanwhile, is getting fed up with Putin for overseeing what the U.S. perceives as an era of muzzled dissent and centralized power.