Silvio Berlusconi, Italy's prime minister, also attended the signing ceremony in a show of support for potential investment in the pipeline project in which Italian oil and gas giant Eni is involved.
The deal would put Russia in direct competition with a European Union-backed pipeline project known as Nabucco, which bypasses Russia to transport gas from the Caspian Sea to Europe via Turkey and the Balkans.
Putin on Thursday acknowledged that the South Stream project would rival the EU one, but he suggested both pipelines were necessary.
"It is obvious there is demand for South Stream," he said.
"Even with the construction of South Stream, Nabucco will not be closed.
"The more infrastructure projects, the better, because that will create reliability and stability of energy supply to Europe."
Al Jazeera's Anita McNaught, reporting from Istanbul, said both pipeline deals underscore Turkey's growing importance as an energy hub.
"Whichever deal goes ahead, or if all of them do, Turkey is the winner here," she said.
"It gets construction contracts, a discount on its gas, the promise of help with new oil pipelines, and perhaps even a better deal from Russia on the construction of its first nuclear power plant."