In a remark apparently aimed at the United States and the NATO alliance, Mr Putin also warned of "foreign sponsors" that he suggested were encouraging Tbilisi to provoke Moscow.
The angry denouncement underlined a deepening crisis in bilateral relations following Georgia's arrest of four Russian soldiers on spying charges last week.
Speaking at an emergency meeting of Russia's security council, the Russian President said he considers the arrests "an act of state terrorism with the taking of hostages," according to a Kremlin statement.
Earlier today, in remarks broadcast on Russian television, he likened Georgia's leadership to the executor of Stalin's murderous purges.
Troops on alert
Mr Putin also ordered the resumption of a withdrawal of all forces from Georgia -- an operation that had been been interrupted on Saturday due to safety concerns.
Russia evacuated virtually all its diplomatic staff from its embassy in Tbilisi over the weekend.
The head of the Russian military in the Caucasus said that Russia's regional forces, including in Georgia, were "at heightened military readiness".
"If any actions are taken against Russian troops, we are ready to take any action, including the use of deadly force," Major General Andrei Popov said in an interview on local radio.
Georgia defiant
Meanwhile, Georgian President Mikheil Saakashvili told an audience in Georgia's Black Sea port of Batumi today not to fear the Russian military.
Relations between Russia and Georgia have been on the decline since mass uprisings in 2003 known as the Rose Revolution brought the pro-Western Mr Saakashvili to power.
He has since pushed his country toward NATO accession over protests from Moscow, which considers the Caucasus to be its traditional sphere of influence.
The two countries have also clashed over Georgia's breakaway regions of Abkhazia and South Ossetia, which Moscow supports and which Saakashvili has vowed to restore control over.
Numerous international leaders called Mr Saakashvili over the weekend to urge a diplomatic solution to the crisis, including the leaders of Ukraine, Poland and Lithuania.
EU foreign policy chief Javier Solana also called the Georgian president and offered to facilitate contacts between the two sides.