* Gazprom has to spend 738.5 bln roubles to upgrade Russian network
* Upgrade cost is 45 pct higher than initial estimate
* Costs add to $23 billion South Stream pipeline bill (Adds details, context)
By Denis Pinchuk
MOSCOW, Dec 9 (Reuters) - Russia's Gazprom will spend 738.5 billion roubles ($23 billion) between 2011 and 2017 to upgrade its domestic gas system for the South Stream link to Europe, raising the project's overall cost by almost 20 percent.
The South Stream project, seen as Russia's response to European Union countries' attempts to find alternative gas suppliers, is planning to transport some 63 billion cubic metres (bcm) of gas through the Black Sea, Bulgaria, Serbia, Hungary and Slovenia into Italy.
A first phase is expected to be ready to pump 15.75 bcm by the end of 2015, with full capacity seen by 2018.
In a document published on its website on Monday, Gazprom said it will have to spend an additional 228.5 billion roubles ($6.9 billion) for new domestic network capacity, up 45 percent from a previous estimate of 510 billion roubles, to make South Stream possible.
Gazprom did not give details explaining the cost increase and the company was not immediately available to comment.
The costs of upgrading Gazprom's Russian pipeline network when added to those of building the South Stream pipeline itself, will now total around $46 billion.
The state gas monopoly previously estimated the cost of South Stream alone - with pipes going under the Black Sea to bypass Belarus and Ukraine through which most Russian gas exports to Europe currently travel - at 17 billion euros ($23.3 billion).
Many analysts have questioned the need for South Stream, saying Gazprom should instead focus on talks with Ukraine, the company's second-largest customer after Germany, to ensure flows westwards through pipelines across its territory are reliable in future.
Disputes over gas prices between Russia and Ukraine in the winters of 2006 and 2009 led to stoppages in exports to Europe, which gets around a third of its gas from Russia.
Last week Gazprom said Ukraine owed it just over $2 billion for gas deliveries between August and November. ($1 = 32.7363 Russian roubles, $1 = 0.7308 euros) (Writing by Katya Golubkova; Editing by Henning Gloystein and Anthony Barker)