Moscow: Armenia and Azerbaijan reported progress on Friday at a summit hosted by Russia but fell short of a breakthrough in a territorial row that world powers fear could erupt into armed conflict.
"The heads of state noted the reaching of mutual understanding on a number of questions, whose resolution helps create conditions to approve the basic principles," the leaders said in a statement published by the Kremlin.
The two sides have faced international pressure to sign up to a "basic principles" agreement on the Nagorny Karabakh conflict zone, but apparently did not manage to agree terms at the summit in the Russian Volga city of Kazan.
The leaders were shown sitting around a table and smiling for cameras on Russian television, which did not broadcast their remarks.
The meeting supervised by Russia President Dmitry Medvedev had sparked optimism that Armenian President Serzh Sarkisian and his Azerbaijani counterpart Ilham Aliyev might achieve the first major progress in many years of fruitless talks.
The two sides still exchange deadly fire around the Nagorny Karabakh conflict zone, 17 years after fighting a war over the now Armenian separatist-controlled region in western Azerbaijan.
The Russian Foreign Ministry had said in a statement that the meeting, held behind closed doors, was "expected to play a decisive role in the Nagorny Karabakh peace process”.
Moscow added that the document Medvedev hoped to get the two enemies to sign at the meeting was designed to pave the way for "a comprehensive peace agreement" to be sealed at a later date.
In the statement released after the summit, the leaders expressed "gratitude" to the leaders of Russia, the United States and France for their "constant attention to the problem of regulating Nagorny Karabakh."
They also said they "highly rated the personal efforts of the Russian President to help reach agreements”.
But they failed to meet international pressure, expressed in recent days, that they would sign up to a "basic principles" agreement.
US President Barack Obama on Thursday had called the two Presidents and urged them to sign the document, the White House said, while French leader Nicolas Sarkozy sent a letter calling for the agreement to be finalised.
"There are moments in history when the leadership of a country should demonstrate to its people courage, wisdom and the road toward peace," Sarkozy said in the letter released by the Armenian presidency.
The Organisation for Security and Cooperation in Europe -- which has led the international peace initiative since the Karabakh war -- had also expressed hopes for a breakthrough.
"Very rarely have we observed moments when our hopes for a final peace settlement have been as high as they are now," said OSCE Secretary General Marc Perrin de Brichambaut.
Armenia`s Sarkisian told a meeting of the Council of Europe on Wednesday that he was "full of optimism" but fearful of new demands from Azerbaijan.
In a sign of continuing differences, Azerbaijan`s Aliyev responded in an interview on Thursday that Armenia needed to show "the political will to make important steps forward".
The interim basic principles agreement would see an Armenian withdrawal from areas around Karabakh that were also seized during the post-Soviet war.
It also envisages international security guarantees and a vote on the final status of the territory at some point in the future.
The conflict in the 1990s killed some 30,000 people and forced around a million from their homes.
Western negotiators are concerned that a new flare-up could be even bloodier and potentially threaten pipelines that take Caspian Sea oil and gas from Azerbaijan to Europe.
Russia meanwhile remains sensitive to any rise in hostilities on its vulnerable and already restive southern border.
Huge obstacles remain to a final peace deal because Armenia says Karabakh will never return to Baku`s control while Azerbaijan insists that the region must remain part of its sovereign territory.