Ukraine has hailed tougher Western sanctions against Russia over its alleged backing for pro-Moscow rebels as separatists inched towards talks with mediators on a potential ceasefire to halt the fighting.
The United States and Europe stiffened sanctions on Moscow over Ukraine on Wednesday, with President Barack Obama taking his first direct swipes at the Russian economy's finance, military and energy sectors.
The American package of sanctions packed the most punch and drew an angry threat of serious retaliation from Moscow, further escalating the worst standoff between the Kremlin and the West since the Cold War.
More hesitant EU leaders meeting in Brussels lagged behind but agreed to bolster their own sanctions against Russia, despite fears from some members that they might damage their own fragile economies.
Ukraine's Western-backed President Petro Poroshenko on Thursday welcomed the EU moves that involve the European Investment Bank and European Bank of Reconstruction and Development halting finance for projects in Russia.
"The European Council has taken an important step to support the sovereignty, territorial integrity and independence of Ukraine," Poroshenko said on his Facebook page.
Western leaders say the punitive measures are designed to pressure Moscow into forcing the rebels to end their three-month insurgency that has claimed more than 600 lives.
The sanctions from Washington drew a stinging response from Moscow with Russian President Vladimir Putin warning that they would inflict "very serious damage" on an already tattered US-Russia relationship.
"I am convinced that this will harm the national long-term interests of the American state, the American people," Putin told reporters in Brasilia, according to the ITAR TASS state news agency.
But the immediate pain was felt in Moscow with Russian markets falling more than 2.5 per cent Thursday and the ruble plunging against the euro and US dollar.
Shares in two giant oil firms now barred from US capital markets under the new sanctions fell steeply with Rosneft dropping 5.4 per cent and OA Novatek shares plummeting 6.8 per cent when the MICEX stock exchange opened.
The United States has also targeted major Russian financial institutions, Gazprombank and VEB, as well as eight Russian arms firms to try to punish Moscow for failing to halt the alleged flow of weapons across the border.
"Russia's support for the separatists and violations of Ukraine's sovereignty have continued," Obama said as he unveiled the measures.
Moscow's foreign ministry said Russia would not bow to "blackmail" from Washington and could strike back at the United States.
"We do not intend to tolerate blackmail and reserve the right to take retaliatory measures," the ministry said in a furious statement.
On the ground in eastern Ukraine fierce fighting between government forces and pro-Moscow rebels has intensified in recent days with some 55 civilians killed since the weekend alone.
Germany and France have been spearheading a push to revive talks between Kiev and the rebels over a potential ceasefire deal but attempts by mediators to hold a Skype videoconference with the insurgents fell through on Tuesday.
Senior separatist leaders have said they are committed to holding the internet consultations but gave conflicting information on whether they would take place Thursday or Friday.
Ukrainian forces made a string of major gains after Poroshenko tore up an unsuccessful ceasefire earlier this month. But progress has slowed since rebels retreated into two major regional centres where they have pledged to fight to the end.
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