The project is also a sign that relations between the two bitter historical rivals are warming.
The 300km pipeline from Bursa in Turkey to Komotini in Greece is expected to be operational in 2006, and will later be extended to Italy as part of an extensive pipeline initiative known as the Southern Europe Gas Ring Project.
The Greek-Turkish pipeline is expected to carry 11.5 billion cubic metres of gas per year once connections are made to other planned pipelines, and as demand for Caspian gas - an alternative energy source to the politically volatile Middle East - expands in coming years.
The pipeline should also help diversify resources at a time when oil and gas prices are soaring.
Turkish Prime Minister Recep Tayyip Erdogan and Prime Minister Costas Caramanlis of Greece met at the middle of a bridge over the Meric River - which is called the Evros River in Greece and serves as a border between the two countries - to formally launch construction for the pipeline.
A Greek boy and a Turkish boy exchanged flags.
"This pipeline is connecting two countries and two people together," Caramanlis said. "But most important of all, it is the first and key link in the Southern Europe Gas Ring Project."
Greek PM Costas Caramanlis ( L):
The pipeline connects nations
The pipeline "is important not just for the two countries but for also the countries beyond both ends of the pipeline," said Leo Drollas, chief economist at the Centre for Global Energy Studies in London.
Turkey in recent years have been trying to expand its role as an energy conduit, connecting Europe to the oil and gas riches of the Caspian and Central Asia.
In May, the presidents of Georgia, Turkey and Azerbaijan opened a pipeline that will transport up to 1 million barrels a day of Caspian oil and gas through the southern Turkish port of Ceyhan.
The Baku-Ceyhan pipeline as well as the pipeline inaugurated on Sunday help broaden supplies and are also significant because they bring Caspian oil and gas to the West without going through Russia, which has been an aim of the United States.
"Turkey is a bridge between Europe and rich (oil and gas) resources in the Caspian region and the southern Mediterranean, when the diversification of oil and gas resources in the European energy market is in question," Erdogan said.
Both leaders referred to improving relations between their countries.
"This (project) will help strengthen our friendship and put an end to speculation" about Greek-Turkish ties," Erdogan said.
Caramanlis said:"This is a very important development which shows both countries can cooperate like never before."
Nato allies, Greece and Turkey have been at odds over the war-divided island of Cyprus, as well as over airspace and sea boundaries in the Aegean.
Greek and Turkish diplomats have held regular meetings in an effort to resolve their disputes, and Greece, a member of the European Union since 1981, has become one of the most vocal supporters of Turkey's own contentious EU bid, believing that relations between the two neighbours can only improve as Turkey becomes more attuned to European norms.