UPDATE 1-Gazprom proposes setting up firm in Turkey -source

ANKARA, July 17 (Reuters) - Gazprom (GAZP.MM) has proposed setting up a company in Turkey to handle urban gas distribution and a planned extension of the Blue Stream pipeline to Israel, a senior Turkish energy ministry source told Reuters on Thursday.

The proposed company would also build new gas storage facilities in Turkey.

Separately Russia, Turkey's largest natural gas supplier, also wants to renew a contract under which it exports 6 billion cubic metres of gas annually to Turkey, Turkish Energy Minister Hilmi Guler told reporters.

The contract expires in 2011 and either Turkey's pipeline company Botas or a private company would be eligible to renew the contract.

Guler also said Gazprom (GAZP.MM) is interested in carrying out other energy projects with Turkey, including the expansion of the capacity of the Blue Stream pipeline.

Ankara has been trying to get Russia to put supplies through an oil pipeline running from the Black Sea to the Mediterranean Sea. (Reporting by Orhan Coskun; editing by James Jukwey)