UPDATE 1-Russia monitoring talk of Turkish military base in Azerbaijan, says Kremlin

(Adds Peskov quote, Erdogan, Aliyev detail)

MOSCOW, June 18 (Reuters) - Moscow is closely monitoring developments around a potential Turkish military base in Azerbaijan, a move that could require Russia to take steps to ensure its own security and interests, the Kremlin said on Friday.

Kremlin spokesman Dmitry Peskov said Russia was in close contact with Turkey, a NATO member, on stabilising the situation in the South Caucasus, where fighting last year saw the Azeri army, backed by Turkey, drive ethnic Armenian forces out of swathes of territory they had controlled since the 1990s in and around the Nagorno-Karabakh region.

Turkey and Azerbaijan on Tuesday agreed to increase cooperation in the military sphere, signing a declaration in the city of Shusha, which ethnic Armenians call Shushi, territory gained by Azerbaijan during last year's fighting.

Azeri President Ilham Aliyev said the declaration concerned cooperation on political, economic, trade and energy issues.

"But most important is the agreement on cooperation between Azerbaijan and Turkey in the defence industry sphere and mutual military assistance," Aliyev said on Tuesday at a news conference alongside Turkish President Tayyip Erdogan.

Erdogan was cited as saying by broadcaster NTV on Thursday that he did not exclude a Turkish military base in Azerbaijan.

"There may be development, expansion here later," he said.

When asked about the possibility of a Turkish base springing up in Azerbaijan, Kremlin spokesman Dmitry Peskov said:

"The deployment of military infrastructure by the (NATO) alliance countries near our borders is cause for our special attention, as well as a reason for us to take steps to ensure our security and interests."

The South Caucasus, part of the former Soviet Union, is of special interest to Russia which has traditionally regarded it as its own sphere of influence.

Russian peacekeeping troops are garrisoned in Nagorno-Karabakh after last year's conflict, and Moscow has a military base in neighbouring Armenia. (Reporting by Dmitry Antonov; additional reporting by Tuvan Gumrukcu in Ankara; Writing by Alexander Marrow Editing by Andrew Osborn)